Question

Your local bank offers 4-year certificates of deposit (CDs) 12 % compounded quarterly. How much additional...

Your local bank offers 4-year certificates of deposit (CDs) 12 % compounded quarterly. How much additional interest will you earn over 4 years on a $10,000 CD that is compounded quarterly, compared with one that is compounded annually?

a.

$6,050

b.

$0

c.

$312

d.

$220

Please add calculations.

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Homework Answers

Answer #1

Ans $ 312

FV = Future Value
PV = Present Value
r = rate of interest
n= no of period
COMPOUNDED QUARTERLY
FV = PV (1 + r )n
FV = 10000*(1+12%/4)^16
FV = 16047
INTEREST = FV - PV
16047.06 - 10000
6047
COMPOUNDED MONTHLY
FV = PV (1 + r )n
FV = 10000*(1+12%)^4
FV = 15735
INTEREST = FV - PV
15735.19 - 10000
5735
DIFFERENCE IN INTEREST = 6047 - 5735
312
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