Question
Tavius wants to invest 2,500 Which option will earn him the best value? A. A two-year certificate of deposit with a nominal interest rate of 3 percent. B. A savings account with 3 percent interest compounded annually. C. A three-yeal certificate of deposit with a nominal interest rate of 4 percent. D. A savings account with 3 percent simple interest.
Answer
4
(238 Votes)
Martha
Veteran · Tutor for 12 years
Answer
To determine which option will provide Tavius with the best value, we need to calculate the return on investment for each of the four options:Option A implies investing in a two-year certificate of deposit with a nominal interest rate of 3 percent. Here, we consider the concept of nominal interest, assuming that the interest is compounded annually. Option B suggests investing in a savings account with a 3 percent interest rate that is compounded annually. We will apply the compound interest formula for this option.Option C mentions an investment in a three-year certificate of deposit with a nominal interest rate of 4 percent. Similar to option A, this situation calls for simple interest compounded annually.Option D deals with a savings account that generates 3 percent simple interest. We calculate the total return for this option via the formula for simple interest.Let's get down to the actual calculations:1. For option A: The formula for compound interest is A = P(1 + r/n)^(nt), since it is compounded annually, so the rate is therefore distributed yearly, that's why instead of, n = frequency of compounding = 1, we have, A =
2659.25.2. For option B: Considering the same formula as in option A, since the report is also compounded annually, we get A =
2575. 3. For option C: Going by the same compound interest formula, we get A =
2812.43.4. Option D is calculated using the simple interest formula, A = P + Prt, where P = principal amount = \
2500 +
2575.Comparing all four options, option C, i.e., a three-year certificate of deposit with a nominal rate of 4 percent, offers the highest return of approximately \$2812.43. Hence, Tavius will find the best value with this investment. This is rounded for simplification, researchers might obtain a more detailed result If considers decimal places. Most notably, actual results will depend on market impacts not discussed here.