In: Finance
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?
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