3. Banks offer CDs (certificates of deposit) for their customers. Conventional C

Question

3. Banks offer CDs (certificates of deposit) for their customers. Conventional CDs are time deposits that promise a fixed interest rate. However if a customer cashes out her CD before the CD matures, then the bank imposes a penalty on the customer. Suppose you have S10,000. You are considering buying a 3-month CD with this $10,000, Bank A is offering a 3% APR on its 3-month CD and Bank B is offering a 3% EAR on its 3-month CD Suppose all other aspects of these two banks are the same with regard to their 3-month CDs, which bank would you buy your CD from? Why? By the time your CD matures, how much money would you get back when you cash out your CD when it matures 4. Four years ago, you invested S10,000 in stock ABC. For the four years you have invested in this stock, you did not adjust your position. The following table represents the actual annual returns of the stock over the past four years Years 2014 2015 2016 2017 Actual Annual Return -10% 25% -10% (a) Compute both the arithmetic average annual return and the geometric average annual return of ABC stock over the past four years (b) How much is your ABC stock holding worth at the end of 2017? (c) Which average annual return (arithmetic or geometric) better reflects your actual performance over the past four years?

Explanation / Answer

Answer :- 1

I would buy the CD from the Bank A that is offering a 3% APY

As in case of 3% APY the return percentage we get of 3 months is = 3% * 3/12 = 0.75%

And if in case i accept the offer form Bank B I would receive return =

As per EAR = ( 1 + r )4 = 1 + 0.03

= ( 1 + r ) = 1.007417

Therefore return is only of 0.7417%

Now the Money I get from Bank A after 3 months at the time of maturity is

= 10000 + 10000*0.75% = 10000 + 75 = 10075

As per chegg policy one question is need to answer in case of more than one question

Now feel free to ask any query related to this question.

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