Question

Financial contracts involving investments, mortgages, loans, and so on are based on either a fixed or a variable interest rate. Assume that fixed interest rates for below questions:

Katherine deposited $500 in a savings account at her bank. Her account will earn an annual simple interest rate of 6.6%. If she makes no additional deposits or withdrawals, how much money will she have in her account in 13 years?

a. $929.00
b. $429.00
c. $535.18
d. $1,147.66

If Katherine's savings account earns 6.6% compounded annually, all other things being equal, how much money will Katherine have in her account in 13 years?

a. $929.00
b. $533.00
c. $1,147.66
d. $984.69

Suppose Katherine had deposited $500 in a savings account at a second bank at the same time. The second bank also pays a nominal interest rate of 6.6% but with quarterly compounding. Keeping everything else constant, how much money will Katherine have in her account at this bank in 13 years?

Answer 1

Answer:

Instructions are listed below.

Explanation:

Giving the following information:

1) Deposit= $500

An annual simple interest rate of 6.6%

Number of years= 13 years

To calculate the final value, we need to use the following formula:

FV= PV*[i*n]

FV= 500*(0.066*13)= $429

2) Deposit= $500

An annual compounded interest rate of 6.6%

Number of years= 13 years

To calculate the final value, we need to use the following formula:

FV= PV*(1+i)^n

FV= 500*(1.066^13)

FV= $1,147.66

3) Deposit= $500

A quarterly compounded interest rate of 6.6%

Number of years= 13 years

Now:

n= 13*4= 52

i= 0.066/4= 0.0165

FV= 500*(1.0165^52)= $1,171