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13 November, 16:48

2. Suppose you currently have $3,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 2% interest compounded annually. How much will you have when the CD matures

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  1. 13 November, 17:06
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    The value of the CD would probably be $3183.62 in three years as shown below.

    Explanation:

    The formula applicable here is future value, which means the value of the investment in 3 years at 2% compound interest rate.

    The formula is given as:

    FV=PV * (1+r) ^n

    FV is the unknown here

    PV is the present value of the amount to be invested which is $3000

    r is the rate of return on investment at 2%

    n is the time horizon of the investment which is 3 years

    FV=$3000 * (1+0.02) ^3

    FV=$3183.62

    In other words, by investing in the certificate of deposit, the investor would likely have $3183.62 in three years' time.

    The rate on certificate of deposit is usually low because it is one the safest investment vehicle, hence offers a lower rate of return, that shows clearly the positive relationship between risk and return on investment
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