Question

Derek can deposit $254.00 per month for the next 10 years into an account at Bank A. The first deposit will be made next month. Bank A pays 13.00% and compounds interest monthly. Derek can deposit $2,488.00 per year for the next 10 years into an account at Bank B. The first deposit will be made next year. Bank B compounds interest annually. What rate must Bank B pay for Derek to have the same amount in both accounts after 10 years?

Answer 1

Calculating Future Value from Bank A,

Using TVM Calculation,

FV = [PV = 0, PMT = 254, N = 120, I = 0.13/12]

FV = $61,985.38

Same future value is required from Bank B,

So,

Calculating Rate of Return,

Using TVM Calculation,

I = [PV = 0, PMT = 2,488, N = 10, FV = -61,985.38]

I = 19.17%

Rate of Return = 19.17%