1. Jim makes a deposit of $12,000 in a bank account. The deposit is to earn inte

Question

1. Jim makes a deposit of $12,000 in a bank account. The deposit is to earn interest compounded annually at the rate of 6 percent for seven years. a. How much will Jim have on deposit at the end of seven years? (Hint: What is future value?) b. Assuming the deposit earned a 9 percent rate of interest compounded quarterly, how much would he have at the end of seven years? c. In comparing (a) and (b), what are the respective effective annual yields? (Hint: Consider the future value of each deposit after one year only.) Which alternative is better?

Explanation / Answer

Answer a) Amount deposited 12000 interest rate 6% annually Number of year 7 Future value of deposit = =12000*(1+0.06)^7 18043.56 Answer b) Amount deposited 12000 interest rate 9% quarterly Number of year 7 Number of period = 7*4 Future value of deposit = =12000*(1+0.09/4)^(7*4) 22374.54 Answer c) Effective interest rate - under a = 6% Since interest rate is compounded annually under b = =(1+0.09/4)^4-1 9.31% Alternative b is better as interest rate is higher + compouned interest. Also effective rate is 3.31% higher compared to option-a

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.