Question

Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)True / False.

Answer 1

"True"

Step-by-step explanation:

First we will calculate the compounded values of the Sally Smith investment on Security A and Security B

Security A compounded value after 11 years=1,000(1+5%)^11

=$1,710.34

Security B compounded value after 11 years=1,000(1+12%)^11

=$3,478.55

Difference between Security B and A value=$3,478.55-$1,710.34

=$1,768.21

So based on the above calculations, the answer is "True"