Question: Rosa invests $3000 in an account with an APR of 4% and annual compounding. Julian...

Question: Rosa invests $3000 in an account with an APR of 4% and annual compounding. Julian invests $2500 in an account with an APR of 5% and annual compounding.

A) Compute the balance in each account after 5 and 20 years.

B) Determine, for each account and for the periods of 5 and 20 years, the percentage of the balance that is interest.

Follow-up

Answer the following questions:

Comment on the effect of interest rates and patience.

In the long-term, who made the better investment choice, and why?

Provide some rationale for someone choosing Rosa’s investment option over Julian’s.

Provide some rationale for someone choosing Julian’s investment option over Rosa’s.

Solutions

Expert Solution

Q1: Comment on the effect of interest rates and patience.

Ans: The formula for compounding interest is as follows

Amount (Fv) = Principal (Pv) x (1+Rate) ^ Time

We have 3 variables which determines future value ... Principal, Rate & Time

Higher the Principal, higher the Maturity

Higher the Rate, higher the Maturity

Higher the Time, higher the Maturity

Among three most powerful is Time, which gives exponential effect. As an investor we should focus on the principal & time, but we cannot control the returns which is not in our hand. We can choose the asset class which has potential to give better return.

Q2: In the long-term, who made the better investment choice, and why?

Ans: In long run Julian will get higher maturity as her rate of return is higher compare to Rosa and because of compounding effect, she will score more.

Q3: Provide some rationale for someone choosing Rosa’s investment option over Julian’s.

Ans: As principal displayed by Rosa is higher compare to Julian, however investment rate of Rosa is lower. If someone is investing till 19 years, Rosa will score more.

Q4: Provide some rationale for someone choosing Julian’s investment option over Rosa’s.

Ans: As rate of return of Julian is higher than Rosa, in long term (=>20 years) Julian will get benefited because of the compounding effect. It means if someone is investing for more than 20 years, Julian will score more.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Rosa invests $3500 in an account with an APR of 5% and annual compounding. Julian invests...

Rosa invests $3500 in an account with an APR of 5% and annual compounding. Julian invests $3000 in an account with an APR of 6% and annual compounding. complete parts a through c a. after 5 years Rosa will have a balance of approximately: after 20 years Rosa will have a balance of approximately: after 5 years Julian will have a balance of approximately: after 20 years Julian will have a balance of approximately: b. Determine for each account and...

Use technology to compute the balance. a. An account with annual compounding, an APR of 12%,...

Use technology to compute the balance. a. An account with annual compounding, an APR of 12%, and an initial deposit of $500, after 7 years An account with annual compounding, an AR of 2%, and an initial deposit of $213, after 539 years. After 7 years, the balance obtained by investing $500 at a rate of 12% with an annual compounding will be [...]

Lindsey invests $3,000 in an account earning 4% annual interest. At the same time, Jason invests...

Lindsey invests $3,000 in an account earning 4% annual interest. At the same time, Jason invests $ 6,000 in a different account earning 2% annual interest. In both accounts, the interest is compounded continuously. When do the accounts each hold the same amount? Round your answer to the nearest year.

First Bank of Belmont offers a savings account with an APR of 5% with daily compounding....

First Bank of Belmont offers a savings account with an APR of 5% with daily compounding. United Charlotte Bank offers a savings account with an APR of 5.1% with monthly compounding. Which bank would you prefer to use for your savings? Explain why (Use numbers! Be sure to explain why you prefer one number to the other number).

If the APR is 4% and the compounding period is monthly, what is the EAR? 2.Would...

If the APR is 4% and the compounding period is monthly, what is the EAR? 2.Would you prefer $1000 today or $2000 in 5 years? a.If the prevailing interest rate is 9% b.If the prevailing interest rate is 18% 3What is the present value of a perpetuity that pays an annual cash flow of $150 with prevailing interest rates of 5%? 4What is the present value of a perpetuity that pays its first cash flow of $500 one year from...

Manraj and Lifei are both investing $1000. Manraj invests his $1000 in an account compounding monthly...

Manraj and Lifei are both investing $1000. Manraj invests his $1000 in an account compounding monthly with an APR of r. Lifei splits his investment into two accounts. Both accounts compound monthly at an APR of r (the same rate as Manraj), but with $700 in the first account, and $300 in the second. Compare the value of these accounts after N years. Be sure to clearly explain your reasoning.

Currently, I have $2,500 in my bank account that pays 6% APR with monthly compounding. In...

Currently, I have $2,500 in my bank account that pays 6% APR with monthly compounding. In order to have $12,000 in this account in 5 years, how much money should I add to this account each month starting from next month?

1a. As a deposit customer, I would prefer an account a.with semiannual compounding b.with annual compounding...

1a. As a deposit customer, I would prefer an account a.with semiannual compounding b.with annual compounding c.with daily compounding d.with monthly compounding e. with quarterly compounding 1b.The market in which previously held shares are traded among investors is called the a.broker market b.primary market c.secondary market d.used market e.over the counter market 1c. If the level of interest rates goes up and I have a bond with a fixed coupon rate, I would expect the value of my bond to...

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate...

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded quarterly. Account B has an annual percentage rate of 7.50 percent with interest compounded daily. Which account provides the highest effective annual return? Account A Account B Both provide the same effective annual return. We don't have sufficient information to make a choice.

If you invest $7,000 into a savings account at an annual interest rate of 8% (APR),...

If you invest $7,000 into a savings account at an annual interest rate of 8% (APR), compounded semi-annually, how much will you have in the savings account after 11 years? Enter your response below (rounded to 2 decimal places).

Subjects