You have $7,200 that you want to use to open a savings account. You have found f

Question

You have $7,200 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates (APR) quoted by each bank and why? account A: 3.25 percent, compounded annually account B: 3.18 percent, compounded monthly account C: 3.20 percent, compounded semi-annually account D: 3.15 percent, compounded continuously account E: 3.15 percent, compounded quarterly

Explanation / Answer

Assuming investement period one year

A: 3.25 percent, compounded annually

    FV = PV (1+i)n

         = 7200 (1+0.0325)1= 7434

account B: 3.18 percent, compounded monthly

   FV = PV (1+i)n

         = 7200 (1+(0.0318/12))12= 7432

account C: 3.20 percent, compounded semi-annually

   FV = PV (1+i)n

         = 7200 (1+(0.0320/2))2= 7432

account D: 3.15 percent, compounded continuously

    FV = PV (1+i)n

         = 7200 (1+(0.0315/365))365= 7430

account E: 3.15 percent, compounded quarterly

     FV = PV (1+i)n

         = 7200 (1+(0.0315/4))4= 7429

Therefore, the saving account at A with 3.25% annually is the highest rate and we should accept this one.

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