Question

16. You have $1,000 to deposit in a savings account for 1 year. You can get a passbook savings

account drawing 7.75% interest compounded continuously, or a certificate of deposit paying 8%

compounded quarterly, or a savings bond paying 8.25% compounded annually. Which alternative

should you take?

a. 7.75% compounded continuously

b. 8% compounded quarterly

c. 8.25% compounded annually

d. all of the above are have equal annualized yields

17. You are considering two investments described below:

Investment

A 10% compounded quarterly

B r compounded semiannually

Both investments A and B have equal annual percentage yields. Find r.

a. 19.875%

b. 10%

c. 10.38%

d. 10.125%

e. 12.0%

18. At 18.9% percent compounded annually, $50,000 will double in about:

a. 6.5 years

b. 4 years

c. 9 years

d. 12 years

e. none of the above

Answer 1

Question 16

Alternative C will be chosen because it will give us the highest return.

Justification:

Alternative A : 7.75% compounded continuously

Formula: Present Value * erate * time

=1000*2.718280.075*1

=1077.884

Alternative B : 8% compounded quarterly

Formula : Present Value * (1+(rate/4))time*4

= 1000*(1+(0.08/4))1*4

= 1082.432

Alternative C : 8.25% compounded annually

Formula : Present Value * (1+ rate)time

=1000*(1+0.0825)1

=1082.5

Alternative D : all of the above are have equal annualized yields

It is apparent from the above calculations that all of them are not giving equal annualized yields.