Question

Q1- The local bank pays 4% interest on savings deposits. In a nearby town, the bank pays 1% per quarter. A man who has $3000 to deposit wonders whether the higher interest paid in the nearby town justifies driving there

SHOW SOLUTION FOR FIRST Q

Q-2The local bank pays 4% interest on savings deposits. In a nearby town, the bank pays 1% per quarter. A man who has $3000 to deposit wonders whether the higher interest paid in the nearby town justifies driving there.

1. How much will the man receive after 2 years if he used the nearby town bank? The answer is closest to:

		$3123
		$3246
		$3060
		$3186

Answer 1

To calculate the amount of money the man receive after 2 years if he used the nearby bank, we need to use the Single payment compound amount factor (i.e., we need to find the future value of $3,000 at 1% per quarter interest rate).

The formula for Single payment compound amount factor is

FV = PV * (F/P, i, N)

Where, PV = $3,000

(F/P, i, N) = (1 + i)^N

i = 1% or 0.01

N = 2 year = (2 * 4) quarter = 8

So, FV = $3,000 * (1 + 0.01)⁸

FV = $3,000 * (1.083) = $3249.

So, the man will receive after 2 years if he used the near by bank is:

$3249.

Note : This has to be the corect answer. But there is no such option.

Now if you take (1 + 0.01)⁸ = 1.082, then the answer will be $3,246, the same as the answer for localocal bank.