Question

Which do you prefer: a bank account that pays 10% per year (EAR) for three years or a. An account that pays 5% every six months for three years? b. An account that pays 15% every 18 months for three years? c. An account that pays 1% per month for three years? a. An account that pays 5% every six months for three years? If you deposit $1 into a bank account that pays 10% per year for three years, you will have $ (Round to five decimal places.) If you deposit $1 into a bank account that pays 5% every six months for three years, the amount you will receive after three years is $ . (Round to five decimal places.) Therefore, you will prefer: 5% every six months for three years. (Select from the drop-down menu.) b. An account that pays 15% every 18 months for three years? If the account pays 15% every 18 months for three years, the amount you will receive after three years is S . (Round to five decimal places.) Therefore, you will prefer: 15% every 18 months for three years. (Select from the drop-down menu.) c. An account that pays 1% per month for three years? If the account pays 1% every month for three years, the amount you will receive after three years is $ . (Round to five decimal places.) Therefore, you will prefer: 7. (Select from the drop-down menu.) Enter your answer in each 10% per year for three years 1% every month for three years

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B 2 a. $1.00 Deposit Amount Time (years) Future value 6 $1.33100 $1.34010 at 10% per year at 5% every six months Therfore, you will prefer 5% every six months for three years 8 9 10 11 b. 12 $1.00 Deposit Amount Time (years) Future value $1.33100 $1.32250 at 10% per year at 15% every 18 months Therfore, you will prefer 18 10% per year for three years 19 $1.00 20 c. 21 Deposit Amount Time (years) Future value $1.33100 $1.43077 at 10% per year at 1% per months Therfore, you will prefer 1% every month for the three years

Cell reference -

A 1 2 3 a. Deposit Amount Time (years) 3 Future value =C2*(1+0.1)^3 =C2*(1+0.05)^(C3*2) at 10% per year at 5% every six months Therfore, you will prefer 5% every six months for three years 11 b. Deposit Amount 12 Time (years) 3 Future value =C11*(1+0.1)^3 =C11*(1+0.15)^(2) at 10% per year at 15% every 18 months Therfore, you will prefer 18 10% per year for three years 20 c. Deposit Amount Time (years) 3 Future value =C20*(1+0.1)^3 =C20*(1+0.01)^(3*12) at 10% per year at 1% per months Therfore, you will prefer 1% every month for the three years

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.