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1 April, 03:06

The local bank pays 4% annual interest on savings deposits. In a nearby town, the bank pays 1% per quarter. A man who has $3,425 to deposit wonders whether the higher interest paid in the nearby town justifies driving there. If all money is left in the account for 4 years, how much more interest would he obtain if the out-of-town bank was chosen? (calculate the difference of obtained interests)

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  1. 1 April, 03:27
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    The local bank is the best option.

    Explanation:

    Giving the following information:

    The local bank pays a 4% annual interest on savings deposits. In a nearby town, the bank pays 1% per quarter. A man who has $3,425 to deposit wonders whether the higher interest paid in the nearby town justifies driving there. The money is left in the account for 4 years.

    Which bank is better?

    Local bank:

    FV = PV * (1+i) ^n

    FV = 3425 * (1.04) ^4 = $4,006.77

    Interest = $581.77

    Nearby town bank:

    n = 3*4 = 12 quarters

    FV = 3425 * (1.01^12) = $3859.38

    Interest = 434.38
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