One year ago, Paul divided an investment of $42000 into two equal amounts placed in separate accounts. Both accounts have a nominal rate of interest of 8%. The

Question

One year ago, Paul divided an investment of $42000 into two equal amounts placed in separate accounts. Both accounts have a nominal rate of interest of 8%. The first account is compounded quarterly, whereas the second account is compounded monthly. 4 years from now, what will be the difference between the two account balances?

Answer 1

The difference is $61.

 

Under the monthly set up, the interest earned at the end of 4 years is $7889 and the interst earned at the end of each quarter (i.e every 3 months) totals to $7828.

 

So the difference is $61. The monthly compounding earns more interest.

 

Create and Excel spreadsheet 

 

Month 1

Month 2

and so on till Month 48

 

For Month 1 Formula is 21000*8%/12 + 21000 

For month 2 = The amount on cell above* (8%/12)+ month 1

and so on

 

For the Quarterly column, 

Month 3, month 6 and so on

 

Formula on Month 3 = 21000*(1.08/12*3)

Formula on Month 6 = Cell on month 3*(8%/12*3)+Month 3 cell

and so on till you reach month 48

 

Then the total on cell 48 minus the initial investment of $21000 = the interest earned for both scenarios.