Assumne you needed $10,000 on April 1, 2006, and two options were available: A)

Question

Assumne you needed $10,000 on April 1, 2006, and two options were available: A) Your banker would lend you the money at an annual interest rate of 7%, compounded monthly, to be repaid on september 1, 2006. B) You could cash in a certificate of deposit (CD) that was purchased earlier. The cost of the CD purchased september 1, 2005, was $10,000. If left in the savings and loan company until september 1, 2006 the CD's annual interest is 3.8% compounded monthly. If the CD is cashed in before September 1, 2006, you lose all interest for the first three months and the interest rate is reduced to 1.9%, compounded monthly, after the first three months. Which option is better and by how much? (Assume annual rate of 3.6%, compounded monthly, for any funds for which an interest rate is not specified.)

Explanation / Answer

Option A is better. Better by $1500

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