Week 2 Forum 1

Week 2 Forum 1
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Week 2 Forum 1
Bank deposits by customers earn interest after a given period of time. With the target to get a total of $ 1000 after three years, less money will be deposited for an interest rate of 4 % as compared to a 3% interest rate. An interest rate shows the amount of earning in terms of profit per dollar per month or per year. Thus, a 4 % interest rate per annum will imply that for each dollar deposited, the earnings will be four dollars per annum. Thus, making a deposit of say $ 100 with an interest rate of 4 % per annum means that my money will earn me exactly four dollars for each financial year. Given that the rate of interest is lowered to three, for $ 100, it implies that for each year that my money will be in the saving account, I will receive exactly three dollars (Koller, et al, 2010). The full amount of the interest earned is arrived at by multiplying the starting amount by the current interest rate and the period of time. Thus, less money is required for higher interest rates.
Mathematically, the 4/100*3*Principle amount will give the interest in three years. To get the amount invested, we subtract the interest from $ 1000 which gives $ 1000-0.12P. On the other hand, taking a deposit say K at a 3 % interest in three years yields an interest of 3/100*3*K= 0.09K. The rates are not compounded but instead, they are given in simple terms. Thus, with the simple interest rate of three, the amount invested to earn 0.

09k in three years is given by $ 1000-0.09K. Thus, we need to prove that P is less than K. That is, $1000-0.12p< $1000-0.09k. Therefore, a considerable less amount is required to arrive at a given targeted amount over a certain period at a high rate for all saving accounts.

Reference
Koller, T., Goedhart, M., & Wessels, D. (2010). Valuation: measuring and managing the value of companies (Vol. 499). john Wiley and sons