What might be the savings goal for a person who buys a five-year CD paying 4.67 percent instead of an 18-month savings certificate paying 3.29 percent?
i just do not get this
This is not my field, but I'll give you some possible ideas.
You are describing someone who is willing to have his money tied up for a longer period of time (a 5-yr CD) for a higher rate of interest, not a person who wants a faster turnaround for a lower rate of interest. Therefore, this person might be --
**a person who will retire in 5-6 years.
**a person who has a child who will enter college in 5-6 years.
**a person who plans to look for a home to buy in 5-6 years.
**etc. (What are other financial goals people have?)
To determine the savings goal, we need to compare the returns from a five-year CD with a 4.67% interest rate and an 18-month savings certificate with a 3.29% interest rate.
1. Calculate the difference in interest rates:
The difference between the interest rates on the two options is 4.67% - 3.29% = 1.38%.
2. Determine the length of time to reach the savings goal:
As the five-year CD has a longer maturity period, you need to calculate how many 18-month periods will fit into five years.
Five years equal 60 months, and 18 months fit into 60 months three times (60 ÷ 18 = 3).
Therefore, you will need to reinvest your initial savings certificate three times to match the five-year CD duration.
3. Calculate the difference in returns based on the interest rates:
Start by calculating the return for each investment option separately.
For the five-year CD:
Return = Principal × (1 + Interest Rate) ^ Number of Periods
Return = Principal × (1 + 0.0467)^3
You can now deduce the ratio of the return of the five-year CD to that of the savings certificate by applying the interest rate difference:
Return Ratio = (1 + 0.0467)^3 / (1 + 0.0329)
Once you have the return ratio, you can solve for the savings goal:
Savings Goal = Initial Deposit × Return Ratio
By following these steps, you can calculate the savings goal for a person who buys a five-year CD paying 4.67% instead of an 18-month savings certificate paying 3.29%. Please provide the initial deposit amount to obtain a precise savings goal.