Question

Assume you just inherited $2,500 from a deceased relative and you choose to invest it to start saving for the down payment on a vehicle you plan to purchase 4 years from now.  You are considering the following choices:   Your credit union offers a certificate paying 2% simple interest; a local bank is offering a certificate paying 1.95% compounded quarterly; and a reputable investment firm is offering a certificate paying 1.90% compounded monthly.   Ignoring for now taxes and other special considerations, carefully evaluate your opportunities.  Choose an investment and defend your choice.  (solve each using algebra formulas, then check with spreadsheet function and include in the spreadsheet you submit for this assignment.)

Credit Union:

Bank:

Investment firm:

Your Conclusion:

Answer 1

Here we will determine the future value of each option. The future values using algebraic expressions are:

Credit union: Future value = present value*(1+rt). Thus future value = 2500*(1+4*2%) = $2,700

Bank: Here compounding is quarterly and hence effective rate = [1+(1.95%/4)]^4 – 1 = 1.964306%. Thus future value = 2500*(1.01964306)^4 = $2,702.29

Investment firm: Here compounding is monthly and so effective rate = [1+(1.90%/12)]^12 – 1 = 1.916633%. Thus future value = 2500*(1.0916633)^4 = $2,697.24

Conclusion: As the future value and interest amount is highest in case of the bank you should invest with your local bank.

The spreadsheet functions are shown in the image below: