Question

Tessa has recently inherited $5600 , which she wants to deposit into a CD account. She has determined that her two best bets are an account that compounds monthly at an annual rate of 4.7% (Account 1) and an account that compounds semi-annually at an annual rate of 5.1% (Account 2). Step 1 of 2 : Which account would pay Tessa more interest? Interest formulas

Answer 1

The account that will pay Tessa more interest is: Account 2

How to find the Simple Interest?

Principle amount = $5600

let us calculate the interest for t = 1 year

Case 1:

Rate of interest, r = 4.7%

Compounded monthly i.e number of periods, n = 12

Therefore,

Interest = Principle × (1 + (r/n))
`.^(nt)` - Principle

on substituting the respective values, we get

Interest = $5600 × (1 + (0.047/12))
`.^(12 * 1)` - $5600

Interest = $5868.94 - $5600

= $268.94

Case 2:

Rate of interest, r = 5.1%

Compounded semi-annually i.e number of periods, n = 2

Therefore,

Interest = Principle × (1 + (r/n))
`.^(nt)` - Principle

on substituting the respective values, we get

Interest = $5600 × (1 + (0.051/2))
`.^(2 * 1)` - $5600

Interest = $5889.24 - $5600

= $289.24