[KEY] M114 Hw19 – Completion

Suppose you are considering the following options:

• Bank A has an account with 2.1% APR compounded every day
• Bank B has an account with 2% APR compounded continuously

1a. Which account has a better (higher) APY?

0.021 365
Bank A’s APY is (1 + ) − 1 = 0.02122 = 2.122%
365

Bank B’s APY is 𝑒 0.02 − 1 = 0.02020 = 2.02%

Bank A has a better APY.

1b. What is the 3-year percent change of the Bank A account?

0.021 365(3)
In 3 years, the account has a growth factor of (1 + ) = 1.065. This represents
365
an increase of 6.5%.

1c. What is the 3-year percent change of the Bank B account?

In 3 years, the account has a growth factor of 𝑒 0.02(3) = 1.0618. This represents an
increase of 6.18%.

2. Suppose you put $2000 into an account with 5.4% APR compounded continuously.

2a. What is the balance of the account, 𝑓(𝑡), after 𝑡 years?

𝑓(𝑡) = 2000𝑒 0.054𝑡

2b. What is the APY? Describe the meaning of the APY in a sentence.

The APY is 𝑒 0.054 − 1 = 0.055485 = 5.5485%. This means the account actually grows
by 5.5485% per year.

2c. Use your understanding of the APY to find the balance after 1 year.

Take the initial $2000 and increase by 5.5485% to get 2000(1.055485) = $2110.97.
Alternatively, use 𝑓(1) = 2000𝑒 0.054(1) = $2110.97.

2d. What is the balance after 10 years?

Use 𝑓(10) = 2000𝑒 0.054(10) = $3432.01.