Compound Interest vs. Annuity
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As a financial planner a client comes to you for investment advice. After meeting with him and understanding his needs, you offer him the following two investment options:
Option 1: Invest $20,500 in a savings account at 5.4% interest compounded quarterly.
Option 2: Invest into an ordinary annuity where $4,500 is deposited each year into an account that earns 7.9% interest compounded annually.
SPREADSHEET:
Set up the formula for compound interest for Option 1 and the formula for Future Value of an Annuity for Option 2 in an Excel spreadsheet to calculate the amount earned at the end of 5 years. Be sure to label all variables in your spreadsheet.
MEMO:
After creating the spreadsheet with the two different investment options, write a memo that addresses the following points for your client:
?Explain to your client what compound interest is.
?Explain to your client what an annuity is.
?From the calculations in the Excel spreadsheet for Option 1 and Option 2, explain which investment option is better for your client and why.
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Please see the attached excel file for the problem
MEMO:
Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also earns interest. A loan, for example, may ...
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