An investor has the possibility to deposit $500 in one of two potential bank accounts. Account...

An investor has the possibility to deposit $500 in one of two potential bank accounts. Account A offers an interest rate of 5% p.a. compounded semi-annually whilst Account B offers an interest rate of 4.9% p.a. compounded quarterly. Which account will yield the higherfuture value?

Solutions

Expert Solution

FV = PV*(1 +r)^n

Time = 1 year (assumed)

Account A offers an interest rate of 5% p.a. compounded semi-annually

FV = 5000*(1 + 5/2%)^2

= 5000*(1.025)^2

= 5253.125

Account B offers an interest rate of 4.9% p.a. compounded quarterly.

FV = 5000*(1 + 4.9/4%)^4

= 5000*( 1.01225)^4

= 5249.53

Account A will yeild high future value

jeff jeffy answered 2 years ago

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