Question

You have accumulated $4,450 and are looking for the best rate of return that can be earned over the next year. A bank savings account will pay 8%. A one-year bank certificate of deposit will pay 10%, but the minimum investment is $7,450. Required: Calculate the amount of return you would earn if the $4,450 were invested for one year at 8%. Calculate the net amount of return you would earn if $3,000 were borrowed at a cost of 18%, and then $7,450 were invested for one year at 10%. Calculate the net rate of return on your investment of $4,450 if you accept the strategy of part b. (Round your answer to 2 decimal places.)

Answer 1

a. The amount of return that would be earned if the $4,450 were invested for one year at 8% is:

= $356.

2. The net amount of return that would be earned if $3,000 were borrowed at a cost of 18% to enable investment in CD of $7,450 is:

= $205.

3. The net rate of return on the investment of $4,450 if strategy B were accepted is:

= 4.61%.

Step-by-step explanation:

a) Data and Calculations:

Bank Savings Certificate of Deposit

Savings $4,450 $4,450

Loan - $3,000

Total deposit $4,450 $7,450

Interest rate 8% 10%

Interest on savings $356 $745

Cost of borrowing ($3,000 * 18%) (540)

Net return $356 $205

Net rate of return 4.61% ($205/$4,450 * 100)