ST5–1 Future values for various compounding frequencies Delia Martin has $10,000 that she can deposit in any of three savings accounts for a 3-year period. Bank A compounds interest on an annual basis, bank B compounds interest twice each year, and bank C compounds interest each quarter. All three banks have a stated annual interest rate of 4%.

a. What amount would Ms. Martin have at the end of the third year, leaving all interest paid on deposit, in each bank?

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

c. On the basis of your findings in parts a and

b, which bank should Ms. Martin deal with? Why?

d. If a fourth bank (bank D), also with a 4% stated interest rate, compounds interest continuously, how much would Ms. Martin have at the end of the third year?

Does this alternative change your recommendation in part c? Explain why or why not.