+0  
 
0
52
1
avatar

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?

 Feb 6, 2020
 #1
avatar+21707 
+2

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  

 Feb 6, 2020

32 Online Users

avatar
avatar