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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Business

Brook

26 July, 05:04

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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Answers (1)

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Porter Fry · Answer 1

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