dentify whether the following statements about the simple and compound interest
ID: 2821821 • Letter: D
Question
dentify whether the following statements about the simple and compound interest methods are true or false. Statement True False All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest. The process of eaning compound interest allows a depositor or investor to earn interest ono any interest earned in prior periods. After the end of the second year and all other factors remaining equal, a future value based O on compound interest will exceed a future value based on simple interest. Sarah is willing to invest $30,000 for six years, and is an economically rational investor. She has identified three investment alternatives (L, M, and P) that vary in their method of calculating interest and in the annual interest rate offered. Since she can only make one investment during the six-year investment period, complete the following table and indicate whether Sarah should invest in each of the investments. Note: When calculating each investment's future value, assume that all interest is earned annually. The final value should be rounded to the nearest whole dollar. Make this investment? Yes No Investment Interest Rate and MethodExpected Future Value 5% compound interest 4% simple interest 7% compound interestExplanation / Answer
False
Interest earned in simple interest method is lower than compound interest method
True
In compound interest method, investor can get return on the interest earned also
True
From second year onwards, due to compounding effect, compound interest exceeds simple interest
L : NO
Amount to be deposited = 30,000
Rate = 5%
Time 6 years
Future value = 30,000*(1.05)^6 = 40202.87
M :NO
Amount to be deposited = 30,000
Rate = 4%
Time 6 years
Future value = 30,000 + (30,000*0.04*6) = 37200
P : YES
Amount to be deposited = 30,000
Rate = 7%
Time 6 years
Future value = 30,000*(1.07)^6 = 45021.91
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