Question

Mr. Tom has $ 50,000/- that he can deposit in any of the three saving accounts
for a period of three years. Bank A compounds interest on annual basis, Bank B
compounds interest on semi-annually basis and bank C compounds interest on
quarterly basis. All these banks have a stated rate of 5% per annum.
Required:
(1) Compute Effective Annual Rate (EAR), Mr. Tom can earn from each bank.
(2) What amount would Mr. Tom have at the end of 3rd year, leaving all interest
paid on deposit (no withdrawals), from each bank?

Answer 1

Answer:

1) EAR(A) = 5%, EAR(B) = 5.0625%, EAR(C) = 5.0945%

2) Amount(A) = $57881.25, Amount(B) = $57984.67, Amount(C) = $58037.73

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