posted by HG on .
Jim wants to deposit money in an account to save for a new stereo system in two years. He wants to have $4,000 available at the time. The following rates are available to him:
6.2% simple interest
6.1% compounded annually
5.58% compounded semiannually
5.75% compounded quarterly
Which account(s) should he choose if he wants to invest the smallest amount of money now? I was thinking the 5.57% compunded quarterly or 5.58% compounded semiannually
How much money must he invest to accumulate $4,000 in two years'time?
Imagine you start with $1 (or $1,000 if you prefer).
How much would you have at the end of two years, under each of the schemes?
For example, under the second, starting with $1, you would have
$1 * 1.06 = $1.061 at the end of the first year
$1.061 * 1.06 = $1.12466 at the end of the second year
So to end with $4000, you'd have to start with $4000 / 1.12466.
Do the same for the others, and you have your answer.
(And yes, it's one of those two.)