The First City Bank pays 7 percent interest, compounded annually, on time deposits. The Second City Bank
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The First City Bank pays 7 percent interest, compounded annually, on time deposits. The Second City Bank pays 6.5 percent interest, compounded quarterly.
a. Based on effective interest rates, in which bank would you prefer to deposit your money?
b. Assume that funds must be left on deposit during the entire compounding period to receive any interest. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year?
Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...
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a First City Bank Effective rate 7 Second City Bank You would choose the Firs...View the full answer
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