Question

Steven's savings account switches from compounding interest annually to quarterly. His account earns 3% interest yearly. Steven puts $500 into his account and leaves it for five years. How much more money will he have in his account due to switching from annually to quarterly compounding?

Answer 1

$0.95 more.

Explanation:

The principal of $500, when invested at APR of 3% for 5 years compounded annually will become

`S_1 = 500(1 + (3)/(100))^(5) = 579.64` dollars.

Again, the principal of $500, when invested at APR of 3% for 5 years compounded quarterly will become

`S_2 = 500(1 + (3)/(100 * 4))^(5 * 4) = 580.59` dollars.

Therefore, Steven will have $(580.59 - 579.64) = $0.95 more money in his account due to switching from annually to quarterly compounding. (Answer)