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 (refer to Chapter 3): Invest $5,000 in a savings account at 6.6% interest compounded monthly.
Option 2 (refer to Chapter 3): Invest into an ordinary annuity where $1,100 is deposited each year into an account that earns 4.8% interest compounded annually.
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 6 years. Be sure to label all variables in your spreadsheet.
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.
Attached is the solution to your posted problem.
Here are the answers to the memo:
- Compound interest is the interest that is added to the principal amount on a given time, making it the new principal and in effect, will also earn ...
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