Question

A person wants to invest $14,000 for 3 years and is considering two different investments. The first investment, a money market fund, pays a guaranteed 6.3 % interest compounded daily. The second investment, a treasury note, pays 6.5 % annual interest. Which investment pays the most interest over the 3 -year period?

Select the correct choice below and, if necessary, fill in any answer box(es) to complete your choice. (Do not round until the final answer. Then round to the nearest cent as needed.) A. The treasury note is the better investment since the market fund produces $nothing in interest, and the treasury note pays $nothing in interest. B. The market fund is the better investment since the market fund produces $nothing in interest, and the treasury note pays $nothing in interest. C. Both the market fund and the treasury note produce the same interest with

Answer 1

Computation of Interest amount in Money Market Fund

Given

Investment amount = $ 14000

Interest rate = 6.3% Compounded Daily

Time period = 3 Years

We know that Future Value = Present Value ( 1+i/365)^365n when interest is Compounded daily

Here i=Rate of interest

n =No.of Years

Future Value = $ 14000( 1+0.063/365)^365*3

= $ 14000( 1+0.0001726027)^1095

= $ 14000(1.0001726027)^1095

= $ 14000*1.208021251

= $ 16912

We know that Interest =Maturity amount - Principal amount

= $ 16912-$ 14000

= $ 2912

Interest amount in Money Market Fund is $ 2912.

Computation of Interest in Treasury note

We know that Future Value = Present Value ( 1+i) ^n

Here i =Rate of interest

n =No.of Years

Future Value = $ 14000( 1+0.065)^3

= $ 14000( 1.065)^3

= $ 14000*1.20794963

= $ 16911

We know that Interest =Maturity amount - Principal amount

=$ 16911-$ 14000

= $ 2911

Interest amount in Money Market fund is $ 2911

Since both the Money Market fund and Treasury bond is giving the similar interest with a minor difference of Rs 1. So Option C is Correct.

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