Suppose that you have ₱80,000. You decided to deposit it in a bank and will not withdraw from it for 10 years. A bank offers two types of compound interest accounts. The first account offers 6% interest compounded monthly. The second account offers 6.5% interest compounded semi-annually. Which account will you choose if you want your money to earn more? Explain in 2 sentences.
Answers
Given : Suppose that you have ₱80,000. You decided to deposit it in a bank and will not withdraw from it for 10 years
A bank offers two types of compound interest accounts. The first account offers 6% interest compounded monthly. The second account offers 6.5% interest compounded semi-annually.
To Find : Which account will you choose if you want your money to earn more
Solution:
Principal = 80,000
Time n = 10 Years
6% interest compounded monthly.
R = 6/12 = 1/2 % per month
n = 10 x 12 = 120
A = P(1 + R/100)ⁿ
=> A = 80000 ( 1 + 1/200)¹²⁰
=> A = 80000( 1.8194)
=> A = 1,45,552
6.5% interest compounded semi-annually.
R = 6.5/2 = 3.25 % semi-annually
n = 10 x 2 = 20
A = P(1 + R/100)ⁿ
=> A = 80000 ( 1 + 3.25/100)²⁰
=> A = 80000( 1.8958)
=> A = 1,51,664
1,51,664 > 1,45,552
Hence 6.5% interest compounded semi-annually is better option.
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