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Savings plans A and B have both durations of 5 calendar years.
Savings plan A pays 5.7% annual interest, paid at the end of each year.
Savings plan B pays 5.4% annual interest, paid on monthly basis (12 times a year).
Which savings plan is preferred?

Answers

Answer 1

Based solely on the interest earned, Savings Plan A would be preferred over Savings Plan B.

To determine which savings plan is preferred, we can compare the total interest earned under each plan over the 5-year duration.

For Savings Plan A, the annual interest rate is 5.7%, and the interest is paid at the end of each year. Therefore, the total interest earned can be calculated using the simple interest formula: Principal x Rate x Time. Assuming a principal of $1,000, the total interest earned would be $1,000 x 0.057 x 5 = $285.

For Savings Plan B, the annual interest rate is 5.4%, and the interest is paid on a monthly basis (12 times a year). This means that the interest is compounded monthly.

Using the compound interest formula: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of compounding periods per year, and t is the time in years, we can calculate the total interest earned. Assuming a principal of $1,000, the total interest earned would be $1,000 x [(1 + 0.054/12)^(12x5)] - $1,000 = $279.67.

Comparing the total interest earned, we can see that Savings Plan A yields a higher interest amount ($285) compared to Savings Plan B ($279.67).

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