Homework Help: Bus Finance

Posted by allison on Friday, February 3, 2012 at 7:43pm.

I have inherited $40,000. I want to save it for 5 years to make down payment on new home. I get info from two diff banks.
Bank A - 5.78% APR with semi annual compounding. Bank B - 5.75% APR with daily compounding.
Which bank would you use to maximize your return?
For Bank A - I did .0578*2=1.156. 2P/YR 1.156 NOM% shift EFF% = 1.16.
400000PV 5N 1.16 I/YR FV 41173.53.
Bank B - .0575*365=20.99 365P/YR 20.99 NOM% EFF% = 23.35
400000PV 5N 23.35 I/YR FV 40128.11
BANK A seems to be get higher yield if I did these correctly

Bus Finance - Reiny, Friday, February 3, 2012 at 8:17pm
bank A:
i = .0578/2 = .0289
n = 10
amount = 40000(1.0289)^10 = 53 185.31

bank B
i = .0575/365 = .000157534
n = 1825
amount = 40000(1.000157534)^1825 = 53 322.39

the yield of bank B is greater than A
Bus Finance - allison, Saturday, February 4, 2012 at 6:55am
so I was supposed to divide not multiply for my initial amount and then if I had used those correctly with the NOM% and EFF I should have come up with it correctly? I will try it again. I could swear in my notes he said we had to multiply. Thanks Again

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