Expert: Lynn Houston - 12/22/2008

Question
QUESTION: How do I go about opening a savings account?If I deposited $200 into an account earning 4%annually,how do I compute the compounded quarterly interest earned over a two year period?

ANSWER: To open an acct, pick a bank and tell them you want to open an acct.  They'll give you some papers to sign and that's about it.  As far as the interest, you'd have $216.54 at the end of two years.

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QUESTION: How did you come up with that amount?can you explain please?

Answer
Each time unpaid interest is compounded and added to the principal, the resulting principal is grossed up to equal P(1+i%).  The 4% is a nominal rate. It implies an effective quarterly interest rate of 4%/4 = 1%. Start with $200. At the end of two years it will have accumulated to:
$200 (1+ .01) (1+ .01) (1+ .01) (1+ .01)(1+ .01) (1+ .01) (1+ .01) (1+ .01) = $216.57 (typo on the first answer)