Question

Assume that you have $10,000 to invest in a term deposit. In this situation, explain which of the three (3) deposits listed below (a. – c.) you would select if the selection strategy is totally depend on the higher percentage per annum (per year). a) a 90-day deposit that has a maturity value of $10,250. b) a 130-day deposit that has a maturity value of $10,390. c) a 145-day deposit that has a maturity value of $10,420

Answer 1

We will invest in the term deposit that will yield highest Interest on above amount of $10,000.

The correct option is : OPTION B - i.e. to invest in 130 day deposit that will yield interest amount of $390.

Explanation:

we will apply simple interest formula to derive at the interest rate.

I = PRT , wherein , I = Interest amount; P = Principal amount, R = Rate of Interest and T - Time period.

Now, A ) $10,000 invested for 90 days to yield $10,250. Means here Interest = $ 250 ($10,250 - $10,000), P = $10,000 , T = 90 days or (90/365 = 0.25) and R - we need to find out.

Means I=PRT

=> 250 = 10,000*R*0.25

=> 250 = 2500 R

=> R = 250/2500*100 = 10%

B ) $10,000 invested for 130 days to yield $10,390. Means here Interest = $ 390 ($10,390 - $10,000), P = $10,000 , T = 90 days or (130/365 = 0.36) and R - we need to find out.

Means I=PRT

=> 390 = 10,000*R*0.36

=> 390 = 3562 R

=> R = 390/3562*100 = 10.95%

C ) $10,000 invested for 130 days to yield $10,420. Means here Interest = $ 420 ($10,420 - $10,000), P = $10,000 , T = 90 days or (145/365 = 0.397) and R - we need to find out.

Means I=PRT

=> 420 = 10,000*R*0.397

=> 420 = 3973 R

=> R = 420/3973*100 = 10.57%

So from above, it is clear, Option B will yield maximum return of 10.95%, hence we will invest in option B.