Talayna has some money that she wants to put into a savings account and she has two options. One option pays 2% interest compounded quarterly. Another option pays only 1.5%, but is compounded monthly. If she wants to deposit the money for 5 years, which account is better? If she wants to deposit for 25 years, which account is better? Homework Help ✎
Review the Math Notes box in section 8.1.4
To solve the 2% compounded quarterly for five years, first find the quarterly interest.
The quarterly multiplier becomes 1.005.
Now use some convenient amount of money to use as principal, say $100.
t(n) = 100 · 1.005n
Now I'll evaluate the function after 5 years, or when n = 20.
t(20) = 100 · 1.00520 t(20) = 110.49
So this $100 will become $110.49 after 5 years.
Use this method to compare the two options above for the time indicated.