Take the current amount you have in your checking or savings account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years time with continuous compounding.

Amount: $2500

Question

Take the current amount you have in your checking or savings account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years time with continuous compounding.

Amount: $2500

anonymous · Answer

Continuous compounding function: Pe^(rt)

P is Initial amount
r is rate
t is time in years
So, in your case
Savings Account: 2500e^((.02)(5))  =  2762.93
CoD:                  2500e^((.045)(5))=  3130.81

In other words, CoD's are definitely the way to go, as long as you are SURE you aren't going to need that money for the next five years!