Question

Jane is having difficulty deciding whether to put her savings in the Mystic Bank or in the Four Rivers Bank. Mystic offers a 12% rate compounded quarterly, and Four Rivers offers 14% compounded semiannually. Jane has $40,000 to invest and expects to withdraw the money at the end of five years. The better deal is:
Multiple Choice
Four Rivers because she will earn about $6,442 more.
Four Rivers because she will earn about $6,523 more.
Four Rivers because she will earn about $4,000 more.
Four Rivers because she will earn about $20,000 more.

Answer 1

Jane must therefore deposit her savings in the four rivers bank.

What is compound interest?

Interest that is added to a loan and deposit sum is known as compound interest. In our everyday lives, it is the notion that is employed the most frequently. Compound interest is calculated as a sum using the interest and principal accrued over time. Compound interest versus simple interest differ primarily in this way.

As per the data provided in the question,

Rate, r = 12%

After five years, the total amount, if Jane had saved at Mystic Bank,if Jane had saved at Mystic Bank would be:

$A = P(1+\frac{r}{100} )^n$

For compounded quarterly,

n = 5 × 4

n = 20

A = 40000(1 + 12/(4 × 100))²⁰

A = 72244.44     (i)

If Jane placed her savings with the Four Rivers, then,

A = 40000(1 + 14/(2 × 100))¹⁰

A = 40000 × 1.9671

A = 78686.054  (ii)

Therefore, it is evident that case (ii) is higher than case (i). Jane must therefore deposit her savings in the four rivers bank.

To know more about Compound Interest:

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