Question

Wendy Williams can invest $10,000 in a 1-year CD at 4.5% compounded quarterly or a 1-year CD compounded daily. Determine the amount at maturity of each investment. What is the difference in the amounts?

Answer 1

We can use the formula below in solving the unknown which is the amount at maturity. In the problem, we can use this formula where V is the missing value V = P(1+r/n)^(nt)
For compounded quarterly, the solution is shown below:
V = $10,000 (1 + 4.5%/4) ^(4*1)
V = 10,000 (1.01125)^4
V = $10,457.65

For compounded daily, we have:
V = 10,000 (1.056025)
V = $10,560.25

The difference can be computed same below:
Difference = $10,560.25 - $10,457.65
Difference = $102.6

Answer 2

10,000 x 1.055766 = $10,557.66

10,000 x 1.056025 = $10,560.25

10,557.66 - 10,560.25 = $2.59