Question

If you had a choice between investing $1,000 in a mutual fund that are 7.5% compound interest or a bond that earns simple interest at 7.5% which would you prefer and why

Answer 1

mutual fund

Explanation:

Step one:

given data

let say the investment plan will span for 5 years

so for mutual fund

P= $1000

r= 7.5%= 0.075

t= 5

compound interest

A= P(1+r)^t

substituting

`A= 1000(1+0.075)^5\\\\A=1000(1.075)^5\\\\A=1000*1.436\\\\A=$1436\\\\`

$1436

so for bond

P= $1000

r= 7.5%= 0.075

t= 5

simple interest

A= P(1+rt)

substituting

`A= 1000(1+0.075*5)\\\\A=1000(1+0.375)\\\\A=1000(1.375)\\\\A=1375\\\\`

A=$1375

$1375

I would go for mutual fund compounded interest because it offers extra

$61 (1436-1375) for the same investment capital