Question

11. Investment Return. Thomas can invest $10,000 by purchasing a 1-year T-bill for $9,275, or he can place the $10,000 in a 12-month CD paying 8%. Which investment will provide a higher return? In addition to return, what else should Thomas con-sider when making his investment decision?

Please show work! Thank you.

Answer 1

Answer-

Investment of Thomas

First investment

Investment = $ 9275
Final amount = $ 10000
Number of years = 1

Rate of Interest = [ ( $ 10000 - $ 9275 ) / $ 9275 ] x 100 %

Rate of interest = ( $ 725 / $ 9275 ) x 100 %

Rate of interest = 7.817 %

Second investment = $ 10000 CD for 1 year giving a return of 8 %

The Second investment rate of return is 8 % which is higher than the First investment which is 7.817 % .

Therefore the investment in CD of $ 10000 is better option to invest.

Thomas should also consider the rissk involved in the investment as investment in T-bill is backed by the US Federal government whereas the Certificate of Deposit (CD) may be issued by a bank which bears some risk. the tenure of invdestment shold be considered which is same for both the investments.