Thebusiness manager in Media World intends to invest $4,000. Theinvestment opportunities available are a six month certificate ofdeposit. The investment pays 6% compounded monthly. The manager canalso invest the $4,000 in high interest-savings account that pays atthe rate of 3% compounded daily. The manager is indifference of theinvestment to undertake [ CITATION Tex14 l 1033 ].
Question one: Assuming Media World decides to invest $4,000 in a 6sixmonth certificate of depositPart A
Thefuture value of the CD is the principal amount discounted at thediscount rate, 6%. The formula below is used
WhereFV is the future value
Pis the principal amount: $4,000
Ris the compound interest rate: 6% per annum
Tis the period: 6 months
Theinterest earned during the 6 month period is equal to the differencebetween the future value computed above and the principal amount.
MediaWorld intends to invest in a certificate of deposit. The certificatehas a maturity period of 6 months. Effective rate of the proposedinvestment is computed on an annual basis
Wheren is the number of times in which the principal amount will becompounded during the period under consideration in this case 12months. The certificate of deposit pays 6% compounded monthly.However, the certificate of deposit is for 6 months and hence thereason for dividing the interest rate with 12 months.
Question two: Assuming Media World invests the $4,000 in thehigh-interest savings accountPart A
Thefuture value of the certificate of deposit, CD, at the end of the 6months will be determined using the future value formula
Ris 3% compounded daily
Tis the time period (6 months)
Thesix months interest on the high interest-savings account is equal to
Interest= Future value of high interest-savings account – the principalamount
Interest= 4,060.45 – 4,000
Theeffective rate of investment for the high interest savings accountis
Question Three: Recommendation to Media World Partners
Thesix months certificate of deposit can be considered to be a long-terminvestment compared to the high interest-savings deposit account.Returns from the certificate of deposit are higher than returns fromhigh interest-savings account. The choice on which investment toundertake will depend on how soon the available cash will berequired.
Incase Media World needs cash within the shortest time possible,investing in the high interest-savings account would be the optimaldecision. On the other hand, a six month certificate of deposit wouldbe viable in case the excess cash would be required after six months.The management can undertake either of the investment. The mainconsideration is the urgency of the available cash [ CITATION Cec07 l 1033 ].
Minden, C. (2007). Investing: Making Your Money Work for You. New York: Cherry Lake.
Textbook Equity Edition. (2014). Principles of Economics Volume 1 of 2. Colchester, Essex, England: Lulu.com.