Question

Which do you prefer, a bank account that pays 10% per year (EAR) for three years or a. An account that pays 5% every six months for three years b. B. an account that pays 15% every 18 months for three years? c. An account that pays 1% per month for three years? If you deposit $1 into a bank account that pays 10% per year for three years, you will have $____ Therefore you would prefer _______________ If the account pays 15% every 18 months for three years, the amount you will receive after three years is __________________. Therefore you would prefer___________ If the account that pays 1% per month for three years, he amount you will receive after three years is _________. Therefore you will prefer _________________

Answer 1

Answer a:

If you deposit $1 into a bank account that pays 10% per year for three years, you will have = $1 * (1+10%) ³ = $1.331

If an account that pays 5% every six months for three years, amount you will have = $1 * (1 + 5%) ⁶ = $1.3401

Hence:

If you deposit $1 into a bank account that pays 10% per year for three years, you will have $1.331. Therefore you would prefer an account that pays 5% every six months for three years.

Answer b:

If the account pays 15% every 18 months for three years, the amount you will receive after three years is = $1 * (1 + 15%) ² = $1.3225

Hence:

If the account pays 15% every 18 months for three years, the amount you will receive after three years is $1.3225. Therefore you would prefer to deposit $1 into a bank account that pays 10% per year for three years.

Answer c:

If the account that pays 1% per month for three years, he amount you will receive after three years is = $1 * (1 + 1%) ³⁶ = $1.4308.

Hence:

If the account that pays 1% per month for three years, he amount you will receive after three years is $1.4308. Therefore you will prefer the account that pays 1% per month for three years.