2. Would you prefer making a 25,000 investment that will earn interest at the ra

Question

2. Would you prefer making a 25,000 investment that will earn interest at the rate of 6 percent compo unded monthly or making the same S25,000 investment at 7 percent compounded annually? (Hint: Consider one year only.) 3. Jones can deposit S5,000 at the end of each six-month period for the next 12 years and earn interest at an annual rate of 8 percent, compounded semiannually. What will the value of the investment be after 12 years? If the deposits were made at the beginning of each year, what would the value of the investment be after 12 years?

Explanation / Answer

2. Effective annual rate with monthly compounding = (1+6%/12)^12 - 1 = 6.17%

so the 7% annual rate is better

3. n = 24, ,PV = 0, pmt = 5000, rate = 4%

use fv function in excel

value after 12 years = 195,413.02

if payment is made at beginning = 195,413.02*1.04 = 203,229.54

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