Question

Joseph inherited $8,000 and plans to invest it for twenty years. Should he invest it in treasury bills at 6.5% interest compounded annually or in a money market account earning 6% annual interest compounded monthly? Justify your answer.

Answer 1

Joseph should invest in treasury bills at 6.5% interest compounded annually because it will yield a higher future value compared to the money market account.

Step-by-step explanation:

To determine whether Joseph should invest in treasury bills or a money market account, we need to compare the future values of these two investments after twenty years.

Case 1: Treasury Bills at 6.5% interest compounded annually

Future Value = Principal * (1 + interest rate / number of compounding periods) ^ (number of compounding periods * time)

Future Value = $8,000 * (1 + 0.065/1) ^ (1*20) = $21,517.96

Case 2: Money Market Account at 6% interest compounded monthly

Future Value = Principal * (1 + interest rate / number of compounding periods) ^ (number of compounding periods * time)

Future Value = $8,000 * (1 + 0.06/12) ^ (12*20) = $21,026.23

Therefore, Joseph should invest in treasury bills at 6.5% interest compounded annually because it will yield a higher future value of $21,517.96 compared to $21,026.23 from the money market account.