Captain Jack has $5,000 to invest for a period of six years. The following three

Question

Captain Jack has $5,000 to invest for a period of six years. The following three alternatives are available at his bank: Account A pays 4%/yr/yr for first year, 5%/yr/yr for year two, and 6%/yr/yr for years three, four, five and six. Account B pays 6%/yr compounded quarterly for all six years. Account C pays interest at the rate of 7%/yr compounded annually for the first two years and then 6%/yr compounded monthly for the last four years. Based on the available balance at the end of the sixth year, which alternative is Captain Jack's best choice? Calculate and clearly indicate the available balance at the end of the 6th year for each account. Clearly state your recommendation to Captain Jack. Show your calculations.

Explanation / Answer

for account A
available balance at the end of 6th year

FV = 5000 * 1.04 * 1.05 * 1.06^4 = 6893.12

for account B
available balance at the end of 6th year

FV = 5000 * (1 + 0.06/4)^24 =7147.51

for account C
available balance at the end of 6th year

FV = 5000 * (1+0.07)^2 * (1 + 0.06/12)^48 = 7272.92

hence captain Jack's best choice is Account C ,

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