If Your Bank Offers a 5% Annual Rate of Return

question 2

Essay

If your bank offers a 5% annual rate of return compounded annually, then at the end of one year your $1.00 deposit would grow by $0.05 to $1.05. However, in the second year, your deposit would increase by $0.0525 to a total ending value of $1.1025. Explain why the second year earns more interest on the investment than the first year.

---

Definitions:

Liability

A financial obligation or amount owed by a company to external parties or creditors, which must be settled through the transfer of assets or services.

Common Stock

A form of corporate equity ownership, a type of security representing ownership in a corporation.

Financing Activity

Transactions involving the exchange of financial instruments, typically related to the borrowing, repaying, or raising of capital for a company.

Cash Inflow

The total amount of money being transferred into a business, typically from operational, investment, and financing activities.