Question

Melvin Indecision has difficulty deciding whether to put his savings in Mystic Bank or Four Rivers Bank. Mystic offers 14% interest compounded semiannually. Four Rivers offers 12% interest compounded quarterly. Melvin has $11,200 to invest. He expects to withdraw the money at the end of 9 years. Calculate interest for each bank and identify which bank gives Melvin the better deal? (Use the Table provided.) (Do not round intermediate calculations. Round your answer to the nearest cent.)

Mystic $

Four Rivers $

Better deal (Mystic or Four Rivers)

Answer 1

The interest offered by Mystic is computed as shown below:

Future value is computed as follows:

= Present value (1 + r)ⁿ

= $ 11,200 x (1 + 0.14 / 2)^{9 x 2}

= $ 11,200 x (1 + 0.07)¹⁸

= $ 37,855.24149

So, the interest amount will be as follows:

= $ 37,855.24149 - $ 11,200

= $ 26,655.24 Approximately

The interest offered by Four Rivers is computed as shown below:

Future value is computed as follows:

= Present value (1 + r)ⁿ

= $ 11,200 (1 + 0.12 / 4)^{9 x 4}

= $ 11,200 (1 + 0.03)³⁶

= $ 32,460.71727

So, the interest amount will be as follows:

= $ 32,460.71727 - $ 11,200

= $ 21,260.72 Approximately

So, as can be seen the Mystic Bank gives the better deal

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