Compound Interest?

Question

You have \$ 40000 to invest. A Municipal Bond offers an annual interest of 4.25 per cent. The other alternative that you are considering is Treasury Note that gives an annual interest of 4 per cent, but has its interest compounded quarterly.
Value after one year of Municipal Bond \$
Value after one year of Treasury Note \$
Which of these is the better investment and by how much at the end of the first year?
Better investment (Municipal Bond or Treasury Bond)
Difference = \$
b. Put your money in the best investment and determine how much money you have after 5 years.
Value of best investment after 5 years is \$

The difference is not $100 and the investment over 5 years was also incorrect. Tanks for all the help just need the two last parts.

Answer 1

Here are the two formulas you need to use:
For simple interest:
A = P(1+rt), where P is the principal, r is the interest rate and t is the time (in years).

For compound interest:
A = P(1+r/n)^(n*t), where P is the principal, r is the interest rate, t is the time (in years) and n is the number of times it is compounded per year.

Answer 2

Municipal bonds are often free of federal, state and local taxes, whereas a T bond is only state tax free. The correct answer depends on the tax bracket of the investor. Municipal bonds can also be purchased below par, which gives a return higher than the coupon yield.

Answer 3

Municipal bond=40000*1.0425=$41700
Treasury note=40000*1.04=$41600
better investment is the municipal bond
difference=$100
A after 5 years=40000(104.25/100)^5
=$49372

Answer 4

This is a job for an HP-12C financial calculator. The muni will be the better deal, but not by much. Either of these, after five years of compounding, will be worth a bit less than $50,000.

Answer 5

Better yet, find out which one is tax deductible. That's a much better incentive than the measly 4% interest, compounded or not.