Abstract

Let's suppose a bank customer has $150,000 to invest. The bank says it can
offer an account where the bank pays interest compounded daily at 3% per annum. As
an alternative, the bank offers also another account, where the interest rate is 2.5% on
the first $50,000 and 3.5% on any amount in excess of $50,000, where again the
interest is compounded daily. The customer wishes to invest the $150,000 for say 5
years. Which account should the customer choose? If the customer were prepared to
wait for 10 years instead of 5, would this make a difference to the account the
customer should choose? Is there much difference between the two choices? Does a
small change in an interest rate lead to a possibly large change in the outcome? More
generally, in what ways do the interest rates and the other variables affect the answers
to such questions?