Question

On the Internet, you find the following offers for opening an online account. Which of them is the best offer if you have $2,000 to save for two years?

Group of answer choices

An interest rate of 5 percent, with the bank charging you a $15 processing fee at the time you open your account

An interest rate of 4 percent, with the bank giving you a $20 bonus at the time you open your account

An interest rate of 4.5 percent, with no processing fee and no bonus

An interest rate of 3.5 percent, with the bank giving you a $35 bonus to open your account

Answer 1

Future values of all deposit options can be computed to compare and select the best offer.

FV = PV x (1+r) n

PV = Present value of deposits

r = the rate of return

n = number of periods

Offer 1:

PV = $ 2,000 - $ 15 = $ 1,985

r = 0.05

FV = $ 1,985 x (1+0.05) 2

     = $ 1,985 x (1.05) 2

     = $ 1,985 x 1.1025

     = $ 2,188.4625

Offer 2:

PV = $ 2,000 + $ 20 = $ 2,020

r = 0.04

FV = $ 2,020 x (1+0.04) 2

     = $ 2,020 x (1.04) 2

     = $ 2,020 x 1.0816

     = $ 2,184.832

Offer 3:

PV = $ 2,000

r = 0.045

FV = $ 2,020 x (1+0.045) 2

     = $ 2,000 x (1.045) 2

     = $ 2,000 x 1.092025

     = $ 2,184.05

Offer 4:

PV = $ 2,000 + $ 35 = $ 2,035

r = 0.35

FV = $ 2,035 x (1+0.035 2

     = $ 2,035 x (1.035) 2

     = $ 2,035 x 1.071225

     = $ 2,179.942875

First offer with interest rate of 5 % and $ 15 rupees processing fees is best option as future value of deposit is highest for this offer.