Question

Scenario:

Joe and Josephina Nestegg wish to invest in a no-risk savings account. They currently have $25,000 in an account bearing 5.25% annual interest, compounded continuously. The following options are available to them:

i. keep the money in the account they currently have

ii. invest the money in an account bearing 5.875% annual interest, compounded annually

iii. invest the money in an account bearing 5.5% annual interest, compounded quarterly

Assignment Steps:

Step #1: Determine the equation for the value for the investment as a function of time for each of the three options.

Step #2: The couple is hoping to have $35,000 saved for a down payment on a house within six years. Calculate the value of each option.

Step #3: Write a brief summary to the couple that describes the implications of these options.

Answer 1

Step 1

The equation for each step is given below.

let x be the value of investment and n time period, then

Option 1 X= 25000 (1.0525)^N

Option 2 X= 25000 (1.05875)^N

Option 3 X= 25000 (1.0562)^N (annual return = (1+5.5/4)^4-1))

Step 2

By solving each equation given in above subject we can calculate value under each option (N=6)

Option 1 X= 25000 (1.0525)^6 = 33,984

Option 2 X= 25000 (1.05875)^6 = 35,213

Option 3 X= 25000 (1.0562)^6 = 34,707

Step 3

Thes best is to go with option 2 as it will give high return.