You have a choice between receiving $500 now and $530 in six months' time.Current interest rates are 10% p.a.(simple interest).As a rational investor,which option would you choose and why?
A)$500 now,because receiving $530 in six months' time is equivalent to earning only 6% interest,whereas in the bank you can earn 10% interest.
B)$530 in six months' time,because $500 invested for six months is only worth $525.
C)$500 now,because it would be worth $550 in six months' time.
D)$500 now,because you have the option to invest or consume goods.

Question

Quizplus · Accepted Answer

If you choose to receive $530 in six months' time, the effective interest rate you will earn is (530-500)/500*100% = 6%. However, if you invest the $500 now at 10% p.a. simple interest for six months, you will have (500*10%*6/12) = $25 interest and a total of $525 in six months' time. Therefore, it is better to choose option B and receive $530 in six months' time.

You Have a Choice Between Receiving $500 Now and $530