Suppose you invest $2,500 in a fund earning 10% simple interest annually. After two years you have the option of moving your money to an account that pays compound interest at an annual effective rate of 7%. Should you move your money to the compound interest account (a) if you wish to liquidate in five more years?(b) if you are confident your money will stay on deposit for a total of ten years?
+36916 After 2 yrs @ 10% simple interest you would have
2500 + 2500(.1)(2) = $ 3000
@ 10 % simple interest, after 5 more years you will have 3000 + 2500(.1)(5) = $ 4250.
Now take your 3000 that you have after 2 years
7% effective and compounded 5 years 3000 (1.07)^5 = $4207.66 Not quite as much as simple interest.....leave it at 10%
In TEN more years:
In ten years @ 10% you will have 3000 + 2500(.1)(10) = $5000
@ 7% compounded you will have 3000(1.07)^10 = 5901.45 It would be best to move it to the 7% account
