Question

In: Statistics and Probability

One of your clients has asked for your advice concerning GH¢40,000, which he wishes to invest...

One of your clients has asked for your advice concerning GH¢40,000, which he wishes to invest for four years. The two alternatives are to use a Bank Account where the 25% per annum rate is compounded quarterly, or a Savings Fund, where the 35% per annum rate is compounded annually.

(a) Calculate the size of each fund at the end of the four years.

(b) Calculate the effective annual interest rate of the Bank Account investment.

(c) Advise your client on the basis of your calculations.

Expert Solution

(a)

Compounded quarterly-

We know, final amount is given by

where,

Initial principle

Annual interest rate (in decimal)

Number of times interest is compounded per year

Number of years

Compounded annually-

We know, final amount is given by

where,

Initial principle

Annual interest rate (in decimal)

Number of times interest is compounded per year

Number of years

So, size of fund after 4 years is

105517.1, when compound quarterly
132860.3, when compound annually

(b)

When compounded quarterly-

Effective annual interest rate is

When compounded annually-

Effective annual interest rate is

(c)

Our client will be advised to invest in Savings Fund.

orchestra answered 2 years ago

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