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Homework Help: Finance math

  1. Nov 26, 2005 #1
    I have become completely bewildered by the following problem:
    Suppose you are a bank manager determining rates on savings accounts. If the account with interest compounded annually offers 5% interest, what rate should be offered on an account with interest compounded daily in order for the interest earned on equal investments to be the same?
    the annual investment, I'm guessing is $1000 because in part "a" of the question, it pointed the amount out, although for a slightly different situation. In part "a", it asked the reader to find the compounded interest for once, twice etc. times during the year.(there are 3 parts to it, btw and the one above is part "c").
    The answer is 4.88%.
    This is the formula I think you're supposed to use:
    Just in case, I have typed up the rest of the problem:
    Oh, and this is from a precalculus course I am enrolled in.
  2. jcsd
  3. Nov 27, 2005 #2


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    Homework Helper

    Let r1 be the annual interest of 5%. This gives an annual "pay-out factor" of (1+r) on a principle of Po. i.e. over one year,

    P = Po(1+r1)

    Let r2 be the equivalent interest rate compounded daily. Then the "pay-out factor) is (1+r2/365)^365 on a principle of Po over a period of one year. i.e.

    P = Po(1+ r2/365)^365

    For the interest rates to be equivalent, the "pay-out factors" must be equal. i.e.

    (1+r1) = (1+r2/365)^365

    You know r1 is 5%, so you can solve for r2.
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