The local bank offers to pay 6% interest on savings deposits. In a nearby town, the bank pays 1.50% per 3-month period (quarterly). A man who has $3000 to put in a savings account wonders whether the higher interest paid in the nearby town justifies driving there to make the deposit. Assuming he will leave all money in the account for 2 years, how much additional interest would he obtain from the out-of-town bank over the local bank? If there is a difference in the additional interest from local bank and out-of-town bank, could you explain why?

Question

George Miller

Business

25 June, 08:03

The local bank offers to pay 6% interest on savings deposits. In a nearby town, the bank pays 1.50% per 3-month period (quarterly). A man who has $3000 to put in a savings account wonders whether the higher interest paid in the nearby town justifies driving there to make the deposit. Assuming he will leave all money in the account for 2 years, how much additional interest would he obtain from the out-of-town bank over the local bank? If there is a difference in the additional interest from local bank and out-of-town bank, could you explain why?

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Amos · Answer 1

how much additional interest would he obtain from the out-of-town bank over the local bank?

Local bank. $370,80

Out of town $379,48

If there is a difference in the additional interest from local bank and out-of-town bank, could you explain why?

We have a 1.5% rate that capitalizes interest quarterly. That is to say that a rate of 6% NAMV (Annual Nominal with quarterly capitalization) is equivalent to a rate of 6.13% EA (Annual Effective).

Explanation:

Monthly % N Monthly % VF

3000 1,06 2 3000 1,12 3.370,80

Monthly % N Monthly % VF

3000 1,02 8 3000 1,13 3.379,48