You decide to invest $800 for 6 years and you have a choice between two accounts. The first pays 7% per year compounded monthly

Question

You decide to invest $800 for 6 years and you have a choice between two accounts. The first
pays 7% per year compounded monthly. The second plan pays 6.85% per year, compounded
continuously. Which is the better investment? Explain. *

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Helga 1 year 2021-09-01T11:37:15+00:00 1 Answers 7 views 0

Answers ( )

    0
    2021-09-01T11:38:58+00:00

    Answer:

    the first plan is better

    this is because the effective annual interest of the first plan is 7.23 which is higher than that of the second plan which is 7.09. this means that the interest rate of the first option would be higher

    2. the future value of option 1 is higher than that of option 2

    Step-by-step explanation:

    The effective annual rate can be used to determine which option is better

    the option with the higher effective annual rate is the better option

    Effective annual rate = (1 + APR / m ) ^m – 1

    M = number of compounding

    (1 + 0.07/12)^12 – 1 = 7.23%

    option 2

    EAR = e^r – 1

    2.7182818^0.0685 – 1 = 7.09%

    2nd method of determining the better investment is to determine the future value of each option

    Option 1 : 800( 1 + 0.07/12)^(12 x6) = 1216.08

    option 2 = 800e^(0.0685 x 6) = 1206.60

    option 1 has the higher future value

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