SOLUTION: Parents of a newborn baby are given a gift of Php 50,000 and will choose between two options to invest
for their child’s college fund. Option 1 is to invest the gift in a fund t
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-> SOLUTION: Parents of a newborn baby are given a gift of Php 50,000 and will choose between two options to invest
for their child’s college fund. Option 1 is to invest the gift in a fund t
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Question 1202153: Parents of a newborn baby are given a gift of Php 50,000 and will choose between two options to invest
for their child’s college fund. Option 1 is to invest the gift in a fund that pays an average annual interest
rate of 8% compounded semiannually; option 2 is to invest the gift in a fund that pays an average
annual interest rate of 7.75% compounded continuously. Which is the better option, assuming each
investment has a term of 18 years? Why? Support your answer with calculations. Answer by ikleyn(52792) (Show Source):
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Parents of a newborn baby are given a gift of Php 50,000 and will choose between two options to invest
for their child’s college fund. Option 1 is to invest the gift in a fund that pays an average annual
interest rate of 8% compounded semiannually; option 2 is to invest the gift in a fund that pays
an average annual interest rate of 7.75% compounded continuously. Which is the better option, assuming
each investment has a term of 18 years? Why? Support your answer with calculations.
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Lets calculate one year growing coefficient: it is enough to make a selection.
Option 1 has one year growing coefficient = = 1.0816.
Option 2 has one year growing coefficient = = 1.08058 (rounded).
Comparing, it is clear that option 1 is better (without making long calculations for 18 years).
