- 14 Marks
QT – May 2018 – L1 – Q1a – Mathematics of Business Finance
Compare returns from a bank account and savings fund with different compounding rates and calculate the effective interest rate.
Question
You have received a prize amount of GH¢5,000 and you wish to invest it for five years. The two alternatives are to use a bank account where the 14% per annum gross rate is compounded monthly or a savings fund where the 14.5% per annum gross rate is compounded annually.
Required:
i) Calculate the size of each fund at the end of the five years. (Ignore tax considerations). (8 marks)
ii) Calculate the effective annual interest rate of the bank account investment. (4 marks)
iii) Advise your client on the basis of your calculations. (2 marks)
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