A. An investor places $1,000 in a Certificate of Deposit that pays 1.5% annual interest. If interest is compounded annually, how much will the investor have after three years?

B. Using the same information in problem 1, how much would the investor have if interest was compounded quarterly?

C. An investor has $1,000 and wants to open a Certificate of Deposit. If Citibank offers a CD that pays interest semiannually at a rate of 1.3% while Chase offers a CD that pays interest at a rate of 1.25% monthly, which CD should the investor buy? Why?

Expert Solution

1.
=Present Value*(1+rate)^n
=1000*(1+1.5%)^3=1045.678375

2.
=Present Value*(1+rate compounded m times per year/m)^(m*n)
=1000*(1+1.5%/4)^(4*3)=1045.93982504059

3.
Amount after 1 year in case of semiannually=1000*(1+1.3%/2)^(2*1)=1013.04225

Amount after 1 year in case of monthly=1000*(1+1.25%/12)^(12*1)=1012.57186382885

Invest in semiannual CD as it offers higher rate and thus results in higher value

jeff jeffy answered 2 years ago

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