anonymous one year ago Help !!

1. anonymous

Larry and Peggy are making decisions about their bank accounts. Larry wants to deposit $350 as a principle amount, with an interest of 4% compounded quarterly. Peggy wants to deposit$350 as the principle amount, with an interest of 6% compounded monthly. Explain which method results in more money after 2 years.

2. anonymous

When they said compounded, do they mean that the money will be added or removed?

3. batman19991

do you have any options

4. anonymous

5. anonymous

I'm kinda stuck because seems obvious which is better because the amount is the same and the 4% quarterly is alot less than 6% monthly. But I don't know if they remove or add the money to it.

6. campbell_st

Well i'd say you need to calculate the future value of each investment option... and then look at who has the most money and why

7. campbell_st

do you know the compound interest formula...?

8. anonymous

So when they say "compounded" is it added ?

9. anonymous

A = P(1 + r/n)nt

10. campbell_st

because the interest is added to the principal and reinvested.... is a a very basic explanation

11. campbell_st

that seems to be the correct formula... you would need to express r as a decimal

12. campbell_st

are the interest rates 4% and 6% per annum or p.a.?

13. anonymous

4% quarterly, so every 3 months. 6% is monthly

14. campbell_st

just seems a little odd... but anyway Larry's Investment is $A = 350(1 + 0.04)^{4 \times 2}$ Peggy's investment $A = 350(1 + 0.06)^{12 \times 2}$

15. campbell_st

looking at the formula you provided the interest may be per annum. since the formula has you dividing by the number of compounding periods in a year. but anyway, do the calculations... see who has the most money... and one of the things to realise is the more compounding periods the more interest you will earn

16. anonymous

I understand now, thank you so much, I think I can get it from here

17. anonymous

I was confused on the "^nt" area but looking at what you gave made me realize it.

18. anonymous

@campbell_st Wait, the formula was A = P(1 + r/n)nt but you made as A = P(1 + r)nt. Which one is it?

19. anonymous

For the one you gave me A = 350(1 + 0.04)^(4 *2) I get 479. For A = 350(1 + 0.04/4)^(4 *2) I get 379.

20. campbell_st

well if the interest rate is 4% per annum and then compounded quarterly r/n = 0.04/4 and for the compounded monthly question if the interest rate is 6% p.a. then r/n = 0.06/12 that's why I asked if the interest was per annum, for both investments... you reply was that the rates were per quarter and per month respectively So then for both investments you just just the interest rate as a decimal