Question

Steven's savings account switches from compounding interest annually to quarterly. His account earns 3% interest yearly. Steven puts $500 into his account and leaves it for five years. How much more money will he have in his account due to switching from annually to quarterly compounding?

Answer 1

Answer:

$0.95 more.

Step-by-step explanation:

The principal of $500, when invested at APR of 3% for 5 years compounded annually will become

$S_1 = 500(1 + \frac{3}{100})^{5} = 579.64$ dollars.

Again, the principal of $500, when invested at APR of 3% for 5 years compounded quarterly will become

$S_2 = 500(1 + \frac{3}{100 \times 4})^{5 \times 4} = 580.59$ dollars.

Therefore, Steven will have $(580.59 - 579.64) = $0.95 more money in his account due to switching from annually to quarterly compounding. (Answer)