Question

21. You are about to deposit $139 into one of the following saving accounts to be left on deposit for 25 years, each bank offers an account with a different interest rate and compounding period. Assuming you want to maximize your wealth, how much money would be in the bank account that offers the best effective rate of return after 25 years?

Bank A. 9.5 percent rate compounded semi annually

Bank B. 9.4 percent rate compounded monthly

Bank C. 9.3 percent rate compounded daily

bank D. 9.2 percent rate compounded continuously

Answer 1

Bank a gives 9.5% rate compounded semi annually, then the effective annual rate is =(1+9,5 1,)?-1 = 1.09725-1 20109725 Bane A's interest - 9.725-4. If Bank B gives 9.44. rate compounded monthly then effective annual rate is *(1+2:45/52-1 = (1.098157-1) -0.098157 Bank B'gives interest: 9.8157 If Bane e gives 9.3% interest rate compould en effective annual rate is (1+9.3%)1=(11097448-1) 0.097448 Bank i'gines interest : 9.7448

If the bank o gives 9.2% rate compounded continuously the effective annual rate is .. .. . 20.092 . e 96365l - 1.096365-1= 946365-4- the above calculations, Bank from all B gives the best offers of interest rate. Effective rate of return after 25 years is 139/(1+9.81577.ja25 - 139X (10.3898) 281444:18 à Bank is's gives best offer interest rates that after a5yrs the interest is 3144418