Question

For long term deposits, Commercial Bank pays 6.5% per annum, while Bank National pays 6.4%per annum compounded monthly. A bad decision will lead to your savings deposit of $10,000 for 5 years, being less by $ Answer (nearest dollar) in ??? bank.

Answer 1

Commercial Bank:

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$10,000*(1.065)^5

=$10,000*1.370086663

=$13700.87(Approx).

Bank National:

We use the formula:
A=P(1+r/12)^12n
where
A=future value
P=present value
r=rate of interest
n=time period.

A=$10,000*(1+0.064/12)^(12*5)

=$10,000*1.375957275

=$13759.57(Approx)

Hence a bad decision will lead to deposit being less by =($13759.57-$13700.87)

=$59(Approx) in Bank National.