Question

Derek can deposit $279.00 per month for the next 10 years into an account at Bank A. The first deposit will be made next month. Bank A pays 14.00% and compounds interest monthly. Derek can deposit $2,447.00 per year for the next 10 years into an account at Bank B. The first deposit will be made next year. Bank B compounds interest annually. What rate must Bank B pay for Derek to have the same amount in both accounts after 10 years?

Answer 1

Answer:

The rate that Bank B must pay Derek to have have the same amount in both accounts after 10 years is:

= 22.611%

Explanation:

a) Data and Calculations:

Monthly deposit in Bank A= $279

Period of deposit = 120 (10 * 12) months

Interest rate = 14% compounded monthly

Using an online finance calculator, the future value =

Sum of all periodic payments = $33,480.00

Total Interest =                           $38,800.23

Future value of funds =             $72,280.23

Annual deposit in Bank B = $2,447

Period of deposit = 10 years

Future value = $72, 280.23

Therefore, the Interest rate = 22.611%