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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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facundobuzzetti

Answer:

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

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