Question

Please help IF you can Thx In advance!!!!!

Chan deposited money into his retirement account that is compounded annually at an interest rate of 7%. Chan thought the equivalent quarterly interest rate would be 2%. Is Chan correct? If he is, explain why. If he is not correct, state what the equivalent quarterly interest rate is and show how you got your answer.

Answer 1

Chan is not correct.

The correct equivalent quarterly interest rate is 1.3108% per quarter.

Explanation:

Given that Chan deposited money into his retirement account.

The interest was 7% compounded annually.

Let P be the amount invested and F the final amount got after 1 year

If compounded annually,

F = P(1+0.07) = 1.07P

If compounded quarterly, no of quarters = 4

F =
`P(1+(7)/(100) )^4`

= 1.3108P

Hence equivalent interest rate = 1.3108% and not 2%