Afriend has $900 that he has saved from his part-time job. he will need his money, plus any interest earned on it, in six months and has asked for your in deciding whether to put the money in a bank savings account at 4.80% interest or to lend it to victor. victor has promised to repay $936 after six months. required: calculate the interest earned on the savings account for six months. (round your answer to 2 decimal places.) calculate the annual rate of return if the money is lent to victor. (do not round intermediate calculations. round your answer to 2 decimal places.) which alternative would you recommend?

Ans.

a) The interest earned on the savings account for six months is $21.35 (Future Value= $921.35)

b) The annual rate of return if the money is lent to Victor is 8.16%

c) The best alternative is lending the money to Victor.

Explanation:

a) Hi, first let´s find the future value if the money is left in a savings account at 4.8% annual, for 6 months. Since the interest rate is annual, we have to convert the semesters into years, that is 1/2= 0.5 years.

Now, we have to use the following formula in order to find the future value o leaving the money into a savings account.

Everything should look like this}

As you can see, if you choose to leave your money in the bank, you will get $21.35 in interest ($921.35 - $900 = $21.35), so it is better to lend this money to Victor ($936 - $900 = $36 in interest)

b) In order to find the rate of return that Victor is paying, we need to do the following.

Therefore Victor is paying 4%, but 4% effective semi-annually, and we need this rate to be annual, so we use the following formula.

So the effective annual rate that Victor is paying you is 8.16%

Best of luck.

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