Chapter 3, Problem 3.10E

Exercise 3.10

LO 2

Compare investment alternatives You have accumulated $15,000 and are looking for the best rate of return that can be earned over the next year. A hank savings account will pay 4%. A one-year bank certificate of deposit will pay 7%, but the minimum investment is $20,000.

Required:

1. Calculate the amount of return you would earn if the $15,000 were invested for one year at 4%.
2. Calculate the net amount of return you would earn if $5,000 were borrowed at a cost of 13%, and then $20,000 were invested for one year at 7%.
3. Calculate the net rate of return on your investment of $15,000 if you accept the strategy of part b.
4. In addition to the amount of investment required and the rate of return offered, what other factors would you normally consider before making an investment decision such as the one described in this exercise?