You and a friend are discussing the return on an account with an initial balance of $100 and an APY of 5%. You want to use the APY Balance Formula, as follows. balance after y years = principal x (1 + APY)Y Your friend says that he has a simpler approach. Each year add 5% of $100, or $5, to the balance. Is your friend's approach valid? What term is used to describe the interest calculation employed by your friend? Under what conditions will your friend's approach give a reasonably good solution? O My friend is describing "Simple Interest," where no compounding is done. This will never give a reasonable estimate for estimating a situation with compounding. O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give a reasonable estimate for the APY Balance Formula when estimating for any length of time. O My friend is describing "Simple Interest," where no compounding is done. This will always be a reasonable estimate whether the time under consideration is short or long. O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give a reasonable estimate for the APY Balance Formula when estimating for short time periods. O My friend is describing "Simple Interest," where no compounding is done. This might be a reasonable estimate if the time under consideration is short.
You and a friend are discussing the return on an account with an initial balance of $100 and an APY of 5%. You want to use the APY Balance Formula, as follows. balance after y years = principal x (1 + APY)Y Your friend says that he has a simpler approach. Each year add 5% of $100, or $5, to the balance. Is your friend's approach valid? What term is used to describe the interest calculation employed by your friend? Under what conditions will your friend's approach give a reasonably good solution? O My friend is describing "Simple Interest," where no compounding is done. This will never give a reasonable estimate for estimating a situation with compounding. O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give a reasonable estimate for the APY Balance Formula when estimating for any length of time. O My friend is describing "Simple Interest," where no compounding is done. This will always be a reasonable estimate whether the time under consideration is short or long. O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give a reasonable estimate for the APY Balance Formula when estimating for short time periods. O My friend is describing "Simple Interest," where no compounding is done. This might be a reasonable estimate if the time under consideration is short.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
I need help with this math question ASAP! please!
Transcribed Image Text:You and a friend are discussing the return on an account with an initial balance of $100 and an APY of 5%. You want to use the APY Balance Formula, as follows.
balance after y years = principal x (1 + APY)Y
Your friend says that he has a simpler approach. Each year add 5% of $100, or $5, to the balance. Is your friend's approach valid? What term is used to describe the interest calculation
employed by your friend? Under what conditions will your friend's approach give a reasonably good solution?
O My friend is describing "Simple Interest," where no compounding is done. This will never give a reasonable estimate for estimating a situation with compounding.
O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give a reasonable estimate for the APY Balance Formula
when estimating for any length of time.
O My friend is describing "Simple Interest," where no compounding is done. This will always be a reasonable estimate whether the time under consideration is short or long.
O My friend is describing "Compounding Interest" because the interest is being multiplied by the number of years. This will give
reasonable estimate for the APY Balance Formula
when estimating for short time periods.
O My friend is describing "Simple Interest," where no compounding is done. This might be a reasonable estimate if the time under consideration is short.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education