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?

Solutions

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

Next > < Previous

Related Solutions

You invest $2,800 in a 4-year certificate of deposit (CD) that pays 3.8% interest, compounded annually....

You invest $2,800 in a 4-year certificate of deposit (CD) that pays 3.8% interest, compounded annually. How much money will you have when the CD matures?

you deposit $500 today in a savings account that pays 6% interest, compounded annually. How much...

you deposit $500 today in a savings account that pays 6% interest, compounded annually. How much will your account be worth at the end of 40 years?

A deposit of $5,000 earns interest at 4% compounded semi-annually. After three-and-a-half years, the interest rate...

A deposit of $5,000 earns interest at 4% compounded semi-annually. After three-and-a-half years, the interest rate is changed to 4.5% compounded quarterly. How much is the account worth after 7 years? Jan is saving for a new bike that will cost $800. She has $500, which she has invested at 7% compounded semi-annually. How many years will it be (approximately) until she has $800? How long will it take for money to double if it is compounded quarterly at 6%?

How much will be in an account at the end of 5 years if you deposit $10,000 today at 8.7% annual interest, compounded semi-annually?

Practice Time Value of Money Problems 1. How much will be in an account at the end of 5 years if you deposit $10,000 today at 8.7% annual interest, compounded semi-annually? 2. What is the balance at the end of 10 years if $2.500 is deposited today and the account earns 4% interest annually? What about if it's quarterly interest? Which one should be more and why? 3. Suppose you want to have $500,000 saved by the time you reach 30 years old....

A) Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually....

A) Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually. Bank B offers a 2-year CD that is compounded semi-annually. The CDs have identical risk. What is the APR that Bank B would have to offer to make its EAR equivalent to the CD at Bank A?

You deposit $600 in an account earning 3% interest compounded annually. How much will you have...

You deposit $600 in an account earning 3% interest compounded annually. How much will you have in the account in 15 years?

You deposit $1,000 in a saving account at 10% compounded annually. How much is your first...

You deposit $1,000 in a saving account at 10% compounded annually. How much is your first year interest? How much is your second year interest? 100, 100 100, 110 100, 120 100, 150

If you deposit $10,000 in a bank account that pays 5% interest annually, how much will...

If you deposit $10,000 in a bank account that pays 5% interest annually, how much will be in your account after 5 years? Do not round intermediate calculations. Round your answer to the nearest cent. What is the present value of a security that will pay $9,000 in 20 years if securities of equal risk pay 7% annually? Do not round intermediate calculations. Round your answer to the nearest cent. Your parents will retire in 28 years. They currently have...

If you deposit $10,000 in a bank account that pays 6% interest annually, how much will...

If you deposit $10,000 in a bank account that pays 6% interest annually, how much will be in your account after 5 years (to two decimal places)? Answer to the nearest cent xxx.xx and enter without the dollar sign.

If you deposit $10,000 in a bank account that pays 9% interest annually, how much will...

If you deposit $10,000 in a bank account that pays 9% interest annually, how much will be in your account after 5 years? Round your answer to the nearest cent.

Subjects