Question

Melvin Indecision has difficulty deciding whether to put his savings in Mystic Bank or Four Rivers Bank. Mystic offers 10% interest compounded semiannually. Four Rivers offers 12% interest compounded quarterly. Melvin has $10,700 to invest. He expects to withdraw the money at the end of 4 years. Calculate the interest earned at the end of Melvin's investment period at each bank. Identify which bank gives him the better deal?

Answer 1

Answer:

Explanation:

You can solve this question using a financial calculator. I'm using (TI BA II plus)

Note: If using the same calculator as me, key in the numbers first before the function .

Option 1: Mystic Bank

Since the 10% offer is compounded semi-annually, adjust the interest rate to semi annual rate and multiply  4 years by 2 since we have 2 semi annual periods per year.

Total duration of investment ;N = 4 * 2 = 8

Interest rate; I/Y = 10%/2 = 5%

Amount invested; PV = -10,700

Recurring payment ; PMT = 0

then CPT FV = $15,808.773

Therefore, Melvin will have $15,808.77 if he invests in Mystic Bank.

Option 2: Four Rivers Bank

Since it offers 12% compounded quarterly, adjust the interest rate to quarterly rate and multiply  4 years by 4 since we have 4 quarters per year.

Total duration of investment ;N = 4 * 4 = 16

Interest rate; I/Y = 12%/4 = 3%

Amount invested; PV = -10,700

Recurring payment ; PMT = 0

then CPT FV = $17,170.359

Therefore, Melvin will have $17,170.36 if he invests in Four Rivers Bank.

Conclusion:

Comparing the future values of these two banks, Four Rivers Bank gives him a better deal.