SOLUTION: Which is the better investment for 9 years: investing $500 at 10% APR or $1,000 at 2% APR? Both investments have annual compounding. After 9 years, $500 at 10% APR would grow to

Algebra ->  Equations -> SOLUTION: Which is the better investment for 9 years: investing $500 at 10% APR or $1,000 at 2% APR? Both investments have annual compounding. After 9 years, $500 at 10% APR would grow to      Log On


   

Question 1131241: Which is the better investment for 9 years: investing $500 at 10% APR or $1,000 at 2% APR? Both investments have annual compounding.
After 9 years, $500 at 10% APR would grow to $__________
After 9 years, $1000 at 2% APR would go to $__________

Answer by greenestamps(13200) About Me  (Show Source):
You can put this solution on YOUR website!


After 9 years, $500 at 10% APR would grow to

500%281.10%29%5E9 = $1178.98

After 9 years, $1000 at 2% APR would go to

1000%281.02%29%5E9 = $1195.09

For an investment for 9 years, the lower interest rate gives a higher final value than the higher interest rate, because the initial investment is twice as much. The advantage of the higher interest rate hasn't had quite enough time to overcome the larger initial investment at the lower rate.

But even by 10 years the investment of the smaller amount at the higher rate overtakes the value of the larger amount at the lower rate. And at 20 years the value of the investment at the lower rate is more than double the value of the other investment.