You have just opened a new savings account o§ering a 1.5% interest rate which is compounded annually. (a) If you deposit $500 today and another $650 one year from today, how much money will you have in the account after two years? (b) Suppose that a competing bank o§ers a 1.4% rate that is compounded monthly. If you decide to deposit your funds in this bank instead, how much money will you have in two years?

Intructions are listed below

Explanation:

Giving the following information:

You have just opened a new savings account offering a 1.5% interest rate which is compounded annually

A) Year 1 = $500 n=2

Year 2 = $650 n=1

We need to use the following formula:

FV = PV * (1+i) ^n

PV = present value

i = interest rate

n = number of years

FV = 500 * (1.015^2) + 650 * (1.015^1) = $1174.86

B) i = 0.014 (annual) i=0.014/12 = 0.0012 (monthly)

Year 1 = 500 n=24

Year 2 = 650 n=12

FV = 500 * (1.0012^24) + 650 * (1.0012^12) = $1174.22