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

Amount to be invested		$         10,000
Selection strategy	Higher percentage per annum (per year)
Option A
a 90-day deposit that has a maturity value of $10,250		Rank
Particulars		Amount in $
Maturity value	A	10,250
Initial investment	B	10,000
Return in 90 days	C = A - B	250
Return % for 90 days	D = C/B	2.5%
Return days for 365 days (per year)	E = D/90x365	10.1%	Third
Option B
a 130-day deposit that has a maturity value of $10,390
Particulars		Amount in $
Maturity value	A	10,390
Initial investment	B	10,000
Return in 130 days	C = A - B	390
Return % for 130 days	D = C/B	3.9%
Return days for 365 days (per year)	E = D/130x365	11.0%	First
Option C
a 145-day deposit that has a maturity value of $10,420.
Particulars		Amount in $
Maturity value	A	10,420
Initial investment	B	10,000
Return in 130 days	C = A - B	420
Return % for 145 days	D = C/B	4.2%
Return days for 365 days (per year)	E = D/145x365	10.6%	Second

In the above analys, the duration of each term-deposit is different. Hence in step E, returns have been converted into annual returns by dividing the return derived in Step D by the tenure and multiplying by 365 days.

The highest return can be derived from option B i.e. 11%. Hence considering the higher percentage per annum (per year) strategy, Option B should be selcted.