Question

annually, how much is in the account at the end of the day on his daughter's 19th birthday? Ho much interest has been earned? 5. You have $ 9000 which you want to invest for 5 years. Bank A pays 6.4% compounded monthly. Bank B pays 6.5% compounded annually. In which bank would your account balance be greater at the end of the 5 years?

Answer 1

5.

Bank A

Compute the monthly interest rate, using the equation as shown below:

Monthly interest rate = Annual rate/ 12 months

                                  = 6.4%/12

                                 = 0.53333333333%

Hence, the monthly rate is 0.53333333333%.

Compute the PVIF at 0.53333333333% and 60 months, using the equation as shown below:

PVIF = 1/ (1 + Rate)^{Number of periods}

              = 1/ (1 + 0.00533333333)⁶⁰

         = 1/ 1.37595727413

         = 0.72676675271

Hence, the PVIF at 0.53333333333% and 60 months is 0.72676675271.

Compute the future value (FV) of investment, using the equation as shown below:

FV = Present value/ PVIF_{0.53333333333%, 60 months}

      = $9,000/ 0.72676675271

      = $12,383.6154673

Hence, the FV of investment is $12,383.6154673.

Bank B

Compute the PVIF at 6.5% and 5 years, using the equation as shown below:

PVIF = 1/ (1 + Rate)^{Number of periods}

              = 1/ (1 + 0.065)⁵

         = 1/ 1.37008666341

         = 0.7298808365

Hence, the PVIF at 6.5% and 5 years is 0.7298808365.

Compute the future value (FV) of investment, using the equation as shown below:

FV = Present value/ PVIF_{6.5%, 5 years}

      = $9,000/ 0.7298808365

      = $12,330.779971

Hence, the FV of investment is $12,330.779971.

The FV of investment with Bank A will be $12,383.6154673 and the FV of investment with bank B will be $12,330.779971. Thus, the FV with Bank A is highest in comparison to the FV with bank B.