Assume that Jane has limited wealth to invest in two assets both of which promise her returns worth $3,000 after two years.The first is a bank deposit assuring an interest of 10 percent per annum and the second is a private bond with an interest rate of 8 percent per annum.Which of the two would require a low initial investment and of what amount?

Question

Quizplus · Accepted Answer

Using the formula for compound interest, we can calculate the initial investment required for both options:

For the bank deposit: 
$3,000 = P(1 + 0.10)^2 
$3,000 = P(1.21) 
P = $2,479.34 
Therefore, the initial investment for the bank deposit is $2,479.34.

For the private bond: 
$3,000 = P(1 + 0.08)^2 
$3,000 = P(1.1664) 
P = $2,564.10 
Therefore, the initial investment for the private bond is $2,564.10.

Based on these calculations, the bank deposit requires the lower initial investment of $2,479.34, making it the better choice for Jane if she has limited funds to invest.

Assume That Jane Has Limited Wealth to Invest in Two