You Have Some Money on Deposit in a Bank Account

question 16

Multiple Choice

You have some money on deposit in a bank account which pays a simple (or quoted) rate of 8.0944 percent,but with interest compounded daily (using a 365-day year) .Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit,and your friend offers to sell it to you for $8,000.If you buy the security,by how much will the effective annual rate of return on your investment change?

• A) 1.87%
• B) 1.53%
• C) 2.00%
• D) 0.96%
• E) 0.44%

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Definitions:

Investment Policies

Guidelines, rules, or procedures that dictate how an organization's funds should be managed and invested.

Rate Of Return

A measure of the profit or loss of an investment over a certain period, expressed as a percentage of the investment's initial cost.

Risk Tolerance

An investor's ability or willingness to endure market volatility and the possibility of losing money in exchange for potentially higher returns.

Remainderman

A remainderman is the person or entity entitled to receive the remainder of an estate after the termination of the life estate or other interest ends.