Which do you prefer: a bank account that pays 4.4% per year (EAR) for three year

Question

Which do you prefer: a bank account that pays 4.4% per year (EAR) for three years or a. An account that pays 2.2% every six months for three years? b. An account tnat pays 8.3% every 18 months for three years? C. An account that pays 0.34% per month for three years? (Note: Compare your current bank EAR with each of the three alternative accounts. Be careful not to round any intermediate steps less than six docimal places.) If you deposit $1 into a bank account that pays 4.4% per year for three years. The amount you will receive after three years is Round to five decimal places.) a. An account that pays 2.2% every six months for 3 years? If you deposit $1 into a bank account that pays 2.2% every six months for three years: The amount you will receive after three years is (Round to five decimal places.) Which bank account would you prefer? b. An account that pays 8.3% every 18 months for 3 years? If you deposit $1 into a bank account that pays 8.3% every 18 months for three years The amount you will receive after three years is (Round to five decimal places.) Which bank account would you prefer? C. An account that pays 0.34% per month for three years? If you deposit $1 into a bank account that pays 0.34% per month for three years The amount you will receive after three years is Round to five decimal places.) Which bank account would you prefer? V.(Select from the drop-down menu.) . (Select from the drop-down menu.) (Select from the drop-down menu.)

Explanation / Answer

Solution: PV $1 Rate 4.40% per year Term 3 years The amount you would receive after 3 Years Using FV function in excel we would find how much amount we would receive after 3 Years FV(4.4%,3,,$1) $1.13789 The amount you will receive after three years is $1.13789 a) PV $1 Rate 2.20% for 6 month Term 3 years Since paid twice a year Nper =3*2 =6 Using FV function in excel we would find how much amount we would receive after 3 Years FV(2.2%,6,,$1) $1.13948 The amount you will receive after three years is $1.13948 $1.13948 > $1.13789 Bank paying 2.2% for 6 months is better option b) PV $1 Rate 8.30% for 18 months Term 3 years Since paid every 18 months Nper = 36 months/18 =2 Using FV function in excel we would find how much amount we would receive after 3 Years FV(8.3%,2,,$1) $1.17289 The amount you will receive after three years is $1.17289 $1.17289 > $1.13789 Bank paying 8.3% for 18 months is better option c) PV $1 Rate 0.34% per month Term 3 Years Since paid every months Nper = 12*3 = 36 Using FV function in excel we would find how much amount we would receive after 3 Years FV(0.34%,36,,$1) $1.12997 The amount you will receive after three years is $1.12997 $1.12997 < $1.13789 Bank paying 4.4 % per year is better option

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