Earned Interest on My Savings Account - Essay Example

Interest for the Certificate of Deposit (CD) is compounded continuously and for savings account is compounded monthly. The Deposit amount is $ 3,000and the duration of deposit is 5 years for both investment options. Interest rate on savings account = 2% compounded monthly Interest rate on CD = 4.5% compounded continuously Then Final amount at end of 5 years for savings account = AS = Then Final amount at end of 5 years for CD = ACD = Final Amount for Savings Deposit Final Amount for CD AS = ACD = Taking Natural Log on both sides, we get Ln AS = Ln ACD = ) Ln AS = Ln 3000 + 60 (Ln 12.

02 – Ln 12) Ln ACD = 3000 + 0.225 Ln AS = 8.006368 + 60 (2.486572 – 2.484907) Ln ACD = + 0.225 Ln AS = 8.106284 Ln ACD = Taking Anti-log for each side (same as taking ex) AS = 3315.24 ACD = 3756.97 So, interest earned with savings account = 3315.24 – 3000 = $ 315.24 Interest earned with CD = 3756.97 – 3000 = 756.97 Thus the interest earned with certificate of deposit is higher than that with savings account. Although the interest earned with certificate of deposit is higher than for a savings accounts, my decision for choosing the saving instrument would also be driven by some other factors.

In a certificate of deposit, the money will remain locked for 5 years whereas in a savings account, I can withdraw and use the money whenever I need. Secondly, if at a certain time, the inflation starts increasing, the real value of the investment in the CD would become significantly lower than the money at hand in the savings account. For example, if after 2 years, the inflation reaches say more than 5% and remains there for the next 3 years, then the real value of the final amount I would receive from the CD would be much less than the actual balance at the end of 2 years in the savings account that I may have used already.

On the other hand, if I expect the inflation to drop in the coming years, CD would be a more attractive option. Also, unlike savings accounts, investments in CDs are insured by the government and I can expect risk free payment of dues at the end of the 5-year term. References Byrd, R. (n.d.). Continuous Compounded Interest Formula. College Algebra Tutorial. Accessed 15 June 2011. http://cs.selu.edu/~rbyrd/math/continuous/ Fifth Third Bank. Certificates of Deposit. Accessed 15 June 2011. https://www.53.com/wps/portal/content?

New_WCM_Context=/wps/wcm/connect/FifthThirdSite/Personal/CDs/ Jaffe, Chuck. Inflation in the Passing Lane: Certificates of Deposit Don't Have Much Horsepower For Today's Savers. Feb 12, 2008. Market Watch. Accessed 15 June 2011. http://www.marketwatch.com/story/certificates-of-deposit-dont-have-much-horsepower-for-savers Stapel, E. (2004). Purple Math Practical Algebra Lessons. Accessed 15 June, 2011. http://www.purplemath.com/modules/index.htm Visual Economics (2010). Choosing a Certificate of Deposit (CD) vs.

a Savings Account. Accessed 15 June 2011. http://www.visualeconomics.com/2010-01-26-choosing-a-certificate-of-deposit-cd-vs-a-savings-account/