Question

Derek can deposit $260.00 per month for the next 10 years into an account at Bank A. The first deposit will be made next month. Bank A pays 15.00% and compounds interest monthly. Derek can deposit $2,534.00 per year for the next 10 years into an account at Bank B. The first deposit will be made next year. Bank B compounds interest annually. What rate must Bank B pay for Derek to have the same amount in both accounts after 10 years?

Answer 1

Calculating Future Value in Bank A,

Using TVM Calculation,

FV = [PV = 0, PMT = 260, T = 120, I = 0.15/12]

FV = $71,556.44

Calculating Interest Rate in Bank B,

Using TVM Calculation,

I = [PV = 0, PMT = 2,534, FV = -71,556.44, T = 10]

I = 21.70%