After all of your glorious battles against the common enemy, you finally decide to retire from...

After all of your glorious battles against the common enemy, you finally decide to retire from hack & slash and live peacefully for the rest of your life. You decide to deposit some (1000 gold) of your hard-earned gold to a bank that earns you the most interest for a 20-year period. You have three options to choose from: Bank of Orgrimmar, Bank of Stormwind and Bank of Ironforge. Each of the banks have different payment plans to choose from as given below: Bank of Orgrimmar: Deposit 50 gold at the end of each quarter for the first 5 years. Then, for the next 15 years, the bank suggests a rate of 5% compounded quarterly. Bank of Stormwind: Deposit 1000 gold now (year 0), then for the next 20 years the bank suggests a rate of 3% compounded annually. Bank of Ironforge: Deposit 100 gold at the end of each year for the first 10 years. Then for the next 10 years, the bank suggests a rate of 8% with a continuous compounding. Which bank should you deposit your gold? Propose your own counteroffer to any bank you favor the most (you may offer to change the interest periods, payment periods or interest rates. Be realistic in your counteroffers!)

Expert Solution

Principal Amount is 1000 Gold
Future Worth = PMT * (1+Interest Rate)Duration

1) Bank of Orgrimmar
i = 5% compounded quarterly
t = 15 years or 60 quarters

It has not been mentioned that the investment has been earning interest in earlier period of 5 years.

1000 * (1+(0.05/4))60 = 2107.1813

2) Bank of Stormwind
i = 3%
t = 20 years

1000 * (1.03)20 = 1806.11

3) Bank of Ironforge
i = 8% compounded continuously
t = 10 years

FW = PMT * (einterest rate*time period)
1000 * (e ^ 0.08*10)
= 1000 * 2.22555
= 2255.5

The bank of Ironforge is the most attractive in terms of returns here.

The lump sum deposit is good but the bank offering only 3% interest rate is not that much attractive.
The interest rate offered by the bank depend upon many factors such as tenure as well as the opportunity cost.
If there is no other issue then I am willing to modify the offer given by Bank of Stormwind.
I will offer an interest rate of 4.25% while other factors are constant.

1000 * (1.0425)20 = 2298.91

Rahul Sunny answered 7 months ago

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