Question

Phil Mickelson is investing $4,444 today at 4 percent annual interest for four years. Which one of the following will increase the future value of that amount?

A.) Increasing the interest rate

B.) Shortening the investment time period

C.) Paying simple interest rather than compound interest

D.) Paying interest only at the end of the investment period rather than throughout the investment period

Answer 1

We can answer the question using the equation of time value of money. According to time value of money equation,
Future value=(Present value)*(1+Interest rate)^(Time period)
So, from the above equation we can see that, the future value will increase when we increase the interest rate or timeperiod or present value of the amount.

Option A is correct.
Option B is incorrect because shortening the investment time period will decrease the future value of that amount.
Option C is incorrect because when interest is compounded, the future value will be more as compared to simple interest.
Option D is incorrect because paying interest throughout the investment period will increase the future value (as compared to paying interest only at the end of the investment period)