Question

MaryJo is considering investing in 2 different mutual funds. Option A has an annual interest rate of 7% and requires a principal of $10,000 with monthly deposits of $200 for 10 years. Option B has an annual interest rate of 9% and requires a principal of $10,000 with monthly deposits of $200 for 5 years.

Answer 1

What is the difference in the final balances of the two mutual funds?

Explanation:

The difference is $12,400.

Answer 2

The option A mutual funds will be more effective.

Explanation:

Option A:

Principal amount = $10000

Monthly deposit = $200

Time = 10 years

Rate of interest = 7%

Total deposit = (200 x 12 x 10) + 10000

= 24000 + 10000

= $34000

Interest = (34000 x 7 ) /100

= 340 x 7

= $2380

Total amount = 34000 + 2380

= $36380

Option B:

Principal amount = $10000

Monthly deposit = $200

Time = 5 years

Rate of interest = 9%

Total deposit = (200 x 12 x 5) + 10000

= 12000 + 10000

= $22000

Interest = (22000 x 9 ) /100

= $1980

Total amount = 22000+1980

= $23980

The option A mutual funds will be more effective.