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# Which of the following investments will have the greater rate of return?

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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.

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.

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