[KEY] M114 Hw18 – Completion

1a. You would like to open an account starting with $600. You are offered 7% APR and
the following choices for compounding frequency. For each choice, write a function
for the account balance after 𝑡 years, 𝑏(𝑡), and the annual percent yield (APY).

Compounding
Definition of 𝑏(𝑡) APY
frequency

Annually 𝑏(𝑡) = 600(1 + 0.07)𝑡 (1 + 0.07)1 − 1 = 7%

0.07 2𝑡 0.07 2
Semiannually 𝑏(𝑡) = 600 (1 + ) (1 + ) − 1 = 7.1225%
2 2

0.07 12𝑡 0.07 12

Monthly 𝑏(𝑡) = 600 (1 + ) (1 + ) − 1 = 7.229%
12 12

0.07 52𝑡 0.07 52

Weekly 𝑏(𝑡) = 600 (1 + ) (1 + ) − 1 = 7.246%
52 52

0.07 365𝑡 0.07 365

Daily 𝑏(𝑡) = 600 (1 + 365 ) (1 + 365 ) − 1 = 7.25%

1b. Which compounding frequency is the best for a long-term account?

Daily (as frequently as possible)

2. Consider a bank that offers a 3.5% APR compounded quarterly (4 times per year).

2a. By what percent does this account grow after 1 month?

Hint: 3 months = 1 quarter = 1/4 of a year.

0.035 4𝑡
Function for 𝑡 years: 𝑓(𝑡) = 𝑃 (1 + ) with initial investment 𝑃.
4
0.035 𝑞
Function for 𝑞 quarters: 𝑓(𝑞) = 𝑃 (1 + ) with initial investment 𝑃.
4
1 1
0.035 4(12) 0.035 3
Using either function, the growth factor at 1 month is (1 + 4 ) or (1 + 4
) or
1.0029. This reflects an increase of 0.29%.

2b. By what percent does this account grow after 1 quarter?

0.035 1
Use (1 + ) − 1 = 1.00875 − 1 = 0.00875 = 0.875% increase in one quarter.
4
This can be done with either 𝑡 = 1/4 year or 𝑞 = 1 quarter.

2c. By what percent does this account grow after 1 year? This is the APY.
0.035 4
Use (1 + ) − 1 = 1.035462 − 1 = 0.035462 = 3.5462% increase in one year.
4
This can be done with either 𝑡 = 1 year or 𝑞 = 4 quarters.