Suppose, instead, Justin deposits 100 into a savings account, paying nominal interest rate i (2) =...

Suppose, instead, Justin deposits 100 into a savings account, paying nominal interest rate i (2) = 2%, at the beginning of each half year for 10 years. The interest earned from this account can be withdrawn at the end of each year and reinvested into another account earning AEIR 4%. Find the accumulated value of his holdings (in both accounts) at the end of 10 years.

Expert Solution

Assumptions:

Interest paid for the savings account is 2% simple interest per annum.

Calculations:

Interest from the savings account is 2% per annum or 1% on a half yearly basis

Thus, the amount earned from the savings accounts deposit is 100 x 1% = 2 per year

This amount at the end of the year is deposited into another account earning Annual Effective Interest Rate ('AEIR') of 4%

Based on the above, the accumulated value of his holdings = Amount accumulated in savings account + Amount accumulated in reinvestment account = 2,210 + 236.6 = 2,446.6.

The working for the amounts earned in each of the accounts is shown below.

jeff jeffy answered 1 year ago

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