Question

To invest capital, the architect Gómez has the following options:

a) Fixed-term investment with interest of 21.5% capitalizable by semesters.

b) Certificates that pay 20.6% capitalized each week.

c) Bonds that give you to earn 20.68% compounded by months.

Which is the best option? 

Answer 1

The best option is (b).

 

Explanation:

Effective interest rate = (1+r)n - 1 

Where r = rate of interest per period 

n = No of periods

 

a)

r = 21.5%/2 = 0.1075

n = 2

 

Effective interest rate per annum

= (1+0.1075)2 - 1 

= 1.2266 - 1

= 22.66%

 

b)

r = 20.6%/52 = 0.00396

n = 52

 

Effective interest rate per annum

= (1+0.00396)52 - 1 

= 1.2282 - 1

= 22.82%

 

c)

r = 20.68%/12 = 0.0172

n = 12

 

Effective interest rate per annum

= (1+0.0172)12 - 1 

= 1.2271 - 1

= 22.71%

 

The best option is b) 'Certificates that pay 20.6% capitalized each week', as the effective interest rate per annum is the highest under this option.

The best option is b) 'Certificates that pay 20.6% capitalized each week', as the effective interest rate per annum is the highest under this option.