Question

# You plan to deposit \$5,500 into a savings account. There are five great banks in your...

You plan to deposit \$5,500 into a savings account. There are five great banks in your town offering terrific interest rates. If your goal is to earn the greatest amount of interest, which bank should you choose?

Bank DEF: 3.70%, compounded monthly

Bank ABC: 3.74%, compounded annually

Bank HIJ: 3.71% compounded semi-annually

Bank XYZ; 3.64% compounded quarterly

Bank KLM: 3.66% compounded continuously

 Deposit (P) = \$    5,500
 Time Period (assume) 1 Year

Formula for Future Value; (Discrete Compounding)  Amount = P(1+(i/n))n, where n= frequency of Compounding

(Continous Compounding)  Amount = P ert, where t= time Period; r = Rate of Interest

 Bank Interest Rate Compounding Frequency Computation of Amount = P(1+i)^n Amount at the end of the year DEF 3.70% Monthly Amount = \$ 5,500 (1+(0.037/12))^(1*12) =\$ 5,500*1.0376 5706.987 ABC 3.74% Annually Amount = \$ 5,500 (1+0.0374)^1 =\$ 5,500*1.0374 5705.7 HIJ 3.71% Semi Annually Amount = \$ 5,500 (1+(0.0371/2))^(1*2) =\$ 5,500*1.03744 5705.943 XYZ 3.64% Quarterly Amount = \$ 5,500 (1+(0.0364/4))^(1*4) =\$ 5,500*1.0369 5702.949 KLM 3.66% Continously Amount = \$ 5,500 *e^(0.0366*1) =\$ 5,500*1.03728 5705.029

As Amount is higher in DEF Bank, it is better to invest in DEF Bank.