Question

1. Determining the better investment opportunity?

Option 1 - You just invested $ 5,000 in a bank that pays you 4.25% simple interest. After 3 years with no withdraw, what is your balance?

(n =3) (i =4.25%) (pv =-5000) (pmt =0) fv =?)

Option 2 - You just invested $ 5,000 in a bank that pays you 4.15% compounded monthly. After 3 years with no withdraw, what is your balance?

(n =3*12) (i =4.15%/12) (pv = -5000) (pmt = 0) fv = ?)

What option (Option 1 or Option 2) is better and explain why?

Answer 1

Since the terms given are for excel, I have used the same to arrive at the solution. Balance after 3 years is:

Option 1

+FV(4.25%,3,0,5000)= $ 5664.98

Option 2

+FV(4.15%/4,12,0,5000)= $ 5659.28

Option 1 is better because you are getting a slightly higher rate of interest, which means the final value that you receive in this case is more. Had both the rates of interest been the same, one typically receives better value when interest is compounded, in which case the answer would then change to option 2.