Question

1. You are planning to deposit $100,000 into a bank account and to leave the funds on deposit for 12 years. Bank A pays interest at a rate of 3%, compounded annually. Bank B pays interest at a rate of 2.5%, compounded semiannually. Bank C pays interest at a rate of 2.2% compounded daily.
   1. If you put your money into Bank A, how much will you have in the account after the 12 years?
   2. If you put your money into Bank B, how much will you have in the account after the 12 years?
   3. If you put your money into Bank C, how much will you have in the account after the 12 years?
   4. What factors contribute to the difference in the amounts in a, b and c? Explain.

Answer 1

SOLUTION:-

a. 142,576.09

b. 134,735.11

c. 130,211.78

d. Factprs which contribured a difference in the amounts is the interest rate per annum and the fequency of compounding.

future value = present value ( 1 + periodic rate ) no, of periods

a). period, years,

FV = 100,000 ( 1 + 0.03)12

FV = 142,576.09

b). period = half year

FV = 100,000 ( 1 + 0.025/2) 12 x 2

FV = 134,735.11

c) period = daily

FV = 100,000 ( 1 + 0.022 / 365) 12 x 365

FV = 130,211.78

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