Investments and loans base their interest calculations on one of two possible me

Question

Investments and loans base their interest calculations on one of two possible methods: the the interest and interest methods. Both methods apply three variables-the amount of principal, the interest rate, and the investment or deposit period-to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables. Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest? Simple interest? Q FV=PV+(PV x 1 x N) OPV = PV / (1+1)" Identify whether the following statements about the simple and compound interest methods are true or false. Statement True False The process of earning compound interest allows a depositor or investor to earn interest onO any interest earned in prior periods All other factors being equal, both the simple interest and the compound interest methods will not generate the amount of earned interest by the end of the first year 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 Boris is wiling to invest $40,000 for six years, and is an economically rational investor. He has investment alternatives (A, B, and C) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the sixe-year investment period, complete the following table and indicate whether Boris should Invest in each of the investments. :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 esc F3 8 2 4 6

Explanation / Answer

1) Two possible methods : the simple interest and the compound interest methods.

2) Compound interest : FV = PV x ( 1 + I)N

Simple interest : FV = PV + (PV x I x N)

3) Statement 1 : True

Statement 2 : False

Statement 3 : True

4) Investment A : FV = $40,000 + ($40,000 x 8% x 6) = $59,200

Investment B : FV = $40,000 x (1 + 3%)6 = $47,762

Investment C : FV = $40,000 x (1 + 5%)6 = $53,604

You can only choose one. Therefore -

Yes : Investment A

No : Investment B and C.

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