9p) Suppose you are given $1000 to invest. You have two options: a savings bond that offers 10% simple nterest, or a savings account that offers 6% annual interest, compounded monthly. a) If you were going to invest the money for 5 years, which is the better choice? How much interest does each option earn over 5 years? b) If you were going to invest the money for 10 years, which is the better choice? How much interest does each option earn over 10 years? (c) Which option do you expect to be the better investment in the long run? Explain your thinking.
9p) Suppose you are given $1000 to invest. You have two options: a savings bond that offers 10% simple nterest, or a savings account that offers 6% annual interest, compounded monthly. a) If you were going to invest the money for 5 years, which is the better choice? How much interest does each option earn over 5 years? b) If you were going to invest the money for 10 years, which is the better choice? How much interest does each option earn over 10 years? (c) Which option do you expect to be the better investment in the long run? Explain your thinking.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:(9p) Suppose you are given $1000 to invest. You have two options: a savings bond that offers 10% simple
interest, or a savings account that offers 6% annual interest, compounded monthly.
(a) If you were going to invest the money for 5 years, which is the better choice? How much interest
does each option earn over 5 years?
(b) If you were going to invest the money for 10 years, which is the better choice? How much interest
does each option earn over 10 years?
(c) Which option do you expect to be the better investment in the long run? Explain your thinking.
Expert Solution
Step 1: INTRODUCTION
An investment is said to be better among two alternatives when it offers higher rate of return in comparison to the other alternative. To analyze it, investor is required to calculate the returns from both the investment and then select the one with the better rate of return.
Step 2: Part a
Interest for saving bond can be determined by the following formula:
Interest for savings account can be determined by the following formula:
a. The amount of interest for the five years can be calculated as follows:
For savings bond:
For savings account:
Savings account is better as it provides more interest.
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