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Chapter 6: Q6Q (page 301)

Question:Jose Oliva is considering two investment options for a $1,500 gift he received for graduation. Both investments have 8% annual interest rates. One offers quarterly compounding; the other compounds on a semiannual basis. Which investment should he choose? Why?

Short Answer

Expert verified

Jose Oliva should choose the quarterly compounding as he could earn$3 more

Step by step solution

01

Step-by-Step SolutionStep 1 Semi-annual Compounding

Semiannualcompounding=Amount×Interestrate=1500×1.16986=$1755

02

Quarterly compounding

Quarterlycompounding=Amount×Interestrate=1500×1.171166=$1758

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Most popular questions from this chapter

LEW Company purchased a machine at a price of \(100,000 by signing a note payable, which requires a single payment of \)123,210 in 2 years. Assuming annual compounding of interest, what rate of interest is being paid on the loan?

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At the end of 2017, Sawyer Company is conducting an impairment test and needs to develop a fair value estimate for machinery used in its manufacturing operations. Given the nature of Sawyer’s production process, the equipment is for special use. (No secondhand market values are available.) The equipment will be obsolete in 2 years, and Sawyer’s accountants have developed the following cash flow information for the equipment.

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