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Which of the following investments will have the greater rate of return.

 

a.) A five year $40000 GIC that earns an annual rate of interest of 6.5% compounded annually.

 

b.)A five year $10000 CSB that pays simple interest of 7.8% per year.

 

c.)An investment where $2500 is deposited each month into an account for five years that pays an annual rate of interest of 9.8% compounded semi-annually.

Guest Oct 1, 2017
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You don't want the "rate of return" on each investment since it is already stated in each case, i.e.,  6.5%, 7.8%, and 9.8%. What you want is the total worth of each investment at the end of its term:

 

a) $40,000 x  1.065^5=$54,803.47 Principal + interest compounded after 5 years.

 

 

b) $10,000 x 7.8% =$780 simple interest for 1 year

$780 x 5 =$3,900 simple interest for 5 years.

$10,000 + $3,900 =$13,900 principal + interest for 5 years.

 

c)  This is a bit more complicated. First, you have to convert the interest rate from compounded semi-annually to compounded monthly to match the monthly deposits of $2,500 each.

9.8 /200 =0.049 + 1 =1.049^1/6 =1.00800475 - 1 =0.00800475 x 12 =9.61% compounded monthly.

Then you have to use this formula to find the FV of the deposits:

FV=P{[1 + R]^N - 1/ R}

FV =2,500[1 + 0.00800475]^(5*12) -1 / (0.00800475)}

FV=$191,588.49 - This is the balance in the acct. after 5 years.

 

As you can see, there is no comparison to c) investment. You may have made a mistake in the monthly payment of $2,500. It may be $250 per month. If that is the case, then you just divide the last answer of $191,588.49 by 10 =$19,158.85.

Guest Oct 1, 2017
edited by Guest  Oct 1, 2017
edited by Guest  Oct 1, 2017

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