Given a choice of two investments, would you choose one that pays a total return

Question

Given a choice of two investments, would you choose one that pays a total return of 10 percent over 10 years or one that pays 0.2 percent per month for 10 years? What annual rate of return does each give you?   

Instruction: Enter your answers in percentages to the nearest hundredth, for example, 3.00 for 3 percent.  

The return of 10 percent over 10 years provides an annual return of  percent.

The return of 0.2 percent per month for 10 years provides an annual return of  percent.   

The investment that pays (Click to select)a total return 10 percent over 10 years0.2 percent per month over 10 years is preferable.

Explanation / Answer

The return of 10 percent over 10 years provides an annual return of (10 / 10)% = 1.00 percent.

The return of 0.2 percent per month for 10 years provides an annual return of (0.2 * 12) = 2.40 percent.

So the investment that pays 0.2 0.2 percent per month over 10 years is preferable because 2.4 > 1.00.

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