Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit the money in an interest earning account until she graduates from college (i.e., four years from now)
In her search for the highest interest earning account, she has narrowed the list down to the following two accounts: (1 ) bank A pays 9 percent interest compounded annually, and (2 ) bank B pays 8 percent interest compounded semiannually. Which is the better offer, and how much will Jeanne have upon graduation from college?
Bank A: n = 4, r = 9%, m = 1
FV = 5,000{[(1.09 )4-1]/.09} = $7,057
Bank B: n = 4, r= 8%, m = 2
FV = 5,000{[1.04 )8-1]/.04} = $6,842
Jeanne should deposit her money in Bank A and she will have $7,057 upon her graduation from college.
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