Problem: You just received a gift of $500 from your grandmother and you are thinking about saving this money for graduation, which is four years away. You have your choice between Bank A, which is paying 7% for one-year deposits, and Bank B, which is paying 6% on one-year deposits. Each bank compounds interest annually.
Q1. What is the future value of your savings one year from today if you save your money in Bank A? Bank B? Which is the better decision?
Q2. What savings decision will most individuals make? What likely reaction will Bank B have?