Reference no: EM132682956

Question - a) Sally Kalunga has K10, 000 that she can deposit in any of the three accounts for three year period. Bank A compounds interest on an annual basis, Bank B compounds interest semi-annually, and bank C compounds interests quarterly. In all banks the stated annual interest rate is 4%.

i) What amount would Ms Kalunga have at the end of the third year, leaving all interest paid on deposit, in each bank.

ii) What is the effective annual rate (EAR) would she earn in each of the banks?

iii) On the basis of your findings in part i.) and ii.) which bank should Miss Kalunga deal with and why?

iv) If a fourt bank (bank D), also with 4% stated interest rate, compounds interest continuously, how much would Ms. Kalunga have at the end of the third year? Does this change your answer in part C in terms of which bank you would advise her to deposit her k10,000.

b) Sally would want to get a bank loan of K10,000. She is looking at five banks that are willing to give her a loan. The nominal rate for all five banks is 10% but they compound interest differently as follows:

Bank Compounding period

A. Annually compounded

B. Semi-annually

C. Quarterly

D. Daily

E. Continuously

With the support of proper calculation, advise sally on which bank to get the loan from. Give reasons for your answer.