Question

Bank-Keys offers 3.45% interest compounded daily on deposits, while Bank-Hunted offers 3.50% interest compounded semi-annually. Which bank would you invest your money? Why? Note: To answer this question you can not invest any dollar and then see the amount you will have. Question doesn’t provide how much money you will invest?

Answer 1

Given interest rates are

Bank Keys 3.45% compounded daily

Bank Hunted 3.50% compounded semi annually

If we invest an amount of 'P' for 't' number of years at 'r' rate of interest, the amount at maturity can be calculated using the formula

A = P[1+(r/n)]^tn

Where,

A - Amount at maturity

P - Amount invested

t - number of years

n - number of compounding per year

r - interest rate

For comparing the given two banks interest rate we can take an amount of $100,000 invested for 2 year at the respective interest rate

In case of Bank Keys,

A = 100,000[1+ (0.0345/365)]^2×365

= 100,000 × 1.07143

= $107,143

In case of Bank Hunted,

A = 100,000[1+(0.035/2)]^2×2

= 100,000 × 1.07186

= $107,186

Bank Hunted will pay more interest on the same amount deposited for same period as compared to Bank Keys.

Therefore I will invest my money in Bank hunted at an interest rate of 3.5% compounded semi annually