Types of FDIC-Insured Investments Essay

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Compound Interest Exercise

The author of this report is to answer to a set of two short-term investing scenarios. For each scenario, the amount of future value will be determined, the amount of interest earned will be summarized and the effective interest rate realized will be tabulated. Upon completion of calculations for both scenarios, the author will then point to which short-term investment works better and thus makes more sense for Envision and their financial goals. While the second of the two scenarios is compounded daily while the first is compounded only monthly, the certificate of deposit is the better overall option for Envision.

In the first scenario, the investment is four thousand dollars invested over six months at a rate of six percent that is compounded monthly. Such an investment would yield a future value of $4,121.51 which means a total of $121.51 was gained from the investment. The second scenario is the same original four thousand dollars invested over the same total time frame.

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However, what is different is that the compounding of interest is daily and the overall interest rate is three percent. That investment draws a future value of $4,060.45 and a total interest amount earned of $60.45, roughly half of the first investment. The effective interest rate of the first investment is 6.15% while it is 3.05% for the second (Investor.gov, 2014)(Calculator Pro, 2014).

Given the above, the clear advantage goes to the first of the two scenarios as the interest gained is nearly double that of the first one. While the interest compounds every day with the second investment that is not enough to counteract the fact that the other interest rate is twice as much over the same As for a risk of lost investment, neither of these investments is that risky as both are FDIC insured just like checking and other deposit accounts (FDIC, 2014). As such, an investment of that size should clearly go to the certificate of deposit unless cash.....

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