Question

Mary Jo plans to invest some money so that she has $8,000 at the end of...

Mary Jo plans to invest some money so that she has $8,000 at the end of three years.

Option A

Option B

Option C

Option D

APR

5.19%

5.11%

5.20%

5.40%

m/per year

365

12

4

1

How much should she invest today given the choices above?

What is her best choice?

What is the EAR for each account? Support your decision in question 2

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Homework Answers

Answer #1

Option A

Option B

Option C

Option D

APR

5.19%

5.11%

5.20%

5.40%

m

365

12

4

1

EAR = (1+APR/m)^m-1 =

5.33%

5.23%

5.30%

5.40%

n = total years =

3

3

3

3

Future Value = FV =

    8,000

     8,000

    8,000

      8,000

Present Value = FV / (1+EAR)^n

$6,846.60

$6,865.21

$6,851.36

$6,832.32

How much should she invest today given the choices above?

--- Check the Present Value row in above table

What is her best choice?

---- Best choice is to invest in Option D

What is the EAR for each account?

--- Check the EAR row in above table

Support your decision in question 2

---- The value we are getting in option D is more than all options hence we should select option D. By investing lower in D she can get $8000

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