Question

The investor plans to invest 2000 UAH and chooses between two investment options:

A-A one-year bond that pays 12% upon maturity (one-year bond with payment of 5% after redemption).
B-A high-yield money market account that pays 1% per month with monthly compounding.
Which of the options is more profitable? Confirm with calculations (APY and the amount of earned interest accrued at the end of the period).

Answer 1

To determine which investment option is more profitable, we need to calculate the Annual Percentage Yield (APY) and the amount of earned interest for each option.

Based on the calculations, Option B, the high-yield money market account, is more profitable.

Step-by-step explanation:

To determine which investment option is more profitable, we need to calculate the Annual Percentage Yield (APY) and the amount of earned interest accrued at the end of the period for each option.

Option A: The bond pays 12% upon maturity. Therefore, using the formula:

APY = (1 + interest rate)^(number of periods) - 1 = (1 + 0.12)^1 - 1 = 0.12 = 12%

The amount of earned interest can be calculated by multiplying the principal amount by the interest rate: 2000 UAH * 0.12 = 240 UAH

Option B: The money market account pays 1% per month with monthly compounding. Therefore, the APY can be calculated as:

APY = (1 + monthly interest rate)^(number of months) - 1 = (1 + 0.01)^12 - 1 = 0.1268 = 12.68%

The amount of earned interest can be calculated using the formula:

Earned Interest = Principal Amount * (APY/100) = 2000 UAH * (12.68/100) = 253.60 UAH

Comparing the APYs and the amount of earned interest, we can conclude that Option B is more profitable.