Question

12 of 14 (9 complete) Which do you prefer a bank account that pays 5% per year (EAR) for three years or a. An account that pays 25% every six months for three years? b. An account that pays 75% every 18 months for three years? c. An account that pays 0.5% per month for three years? a. An account that pays 25% every six months for three years? If you deposit $1 into a bank account that pays 5% per year for three years, you will have 5 (Round to five decimal places) If you deposit $1 into a bank account that pays 2.5% every six months for three years the amount you will receive after three years is (Round to five decimal places Therefore, you will prefer (Select from the drop-down menu) b. An account that pays 75% every 18 months for three years? If the account pays 75% every 18 months for three years, the amount you will receive after three years is SE (Round to five decimal places) Therefore, you will prefer (Select from the drop-down menu.) c. An account that pays 0.5% per month for three years? If the account pays 0.5% every month for three years the amount you will receive after three years is Therefore, vou will prefer Select from the drop-down menu Enter your answer in each of the answer boxes (Round to five decimal places) O Type here to search

Answer 1

a)

The future value of investment is found using the following equation

Future value = Present value $\times$ ( 1 + interest rate)ⁿ

FV = $ 1 $\times$ ( 1 + 0.05)³ =  $ 1.15763

If $ 1 is deposited into an account that pays 5% per year for 3 years, the account will have $ 1.15763

FV = $ 1 $\times$ ( 1 + 0.025)⁶ = $ 1.15969

If $ 1 is deposited into an account that pays 2.5% every six month for 3 years, the amount in the account after 3 years equals  $ 1.15969

Therefore it is prefer " An account that pays 2.5% every six months for three years"

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b)

When the interest rate is compounded once in 18 months , it means it is compounded twice in three years

FV = $ 1 $\times$ ( 1 + 0.075 )²   = 1.15563

If the account pays 7.5% every 18 months for three years, the amount in the account after three years is $ 1.15563

Therefore you will prefer " An account that pays 5% per year"

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c)

FV = $ 1 $\times$ ( 1 + 0.005)^{12 X 3} = $ 1.19668

If the account pays 0.5% every month for three years, the amount in the account after three years is $ 1.19668

Therefore you will prefer " An account that pays 0.5% per month for three years"