Question

CDs are a very safe investment because they are usually insured by the U.S. government. (There are some CDs that are not insured so it is important to always check!) Because they are so safe, CDs earn low rates of interest. The amount earned on an investment is often called the return. In general, investments with higher risk also have the potential for higher rates of return. For example, if you invest in a stock, which is like buying a piece of a company, you might earn far more than you would with a CD. However, you also run the risk of losing all of your money.

Mutual funds are another type of investment used by many people. The U.S. Security and Exchange Commission defines a mutual fund as follows:¹

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other assets. The combined holdings of stocks, bonds, or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

Mutual funds are an attractive investment to many people for several reasons.

• You can invest small amounts of money at a time.
• The fund is managed by a company that does all the work of researching and choosing specific investments.
• In general, there is less risk than owning a single stock because the money is spread across many investments.
• In general, there are higher rates of returns than those available in insured investments like CDs and savings accounts.

However, it is important to understand that mutual funds do still have risks. It is possible to lose some or all of your investment. Also, funds charge fees to pay for the management. Sometimes these fees can be very high.

Selecting investments is an important decision and should be researched carefully. Through this course, you will be introduced to a few basics concepts related to investment, but you should not make any decisions based only on the information presented here.

One of the most important concepts in investing is to take advantage of the power of compounding over time. The following example will help you explore this idea.

In this problem you will compare the effects of different compounding periods on the interest an investment earns. Complete the table below using the values indicated. Show the formula you used, with the correct values, in the second column. In the third column, give the result, rounded to the nearest cent.

• Principal: $1,000
• APR: 4.5%
• Time: 10 years

Compounding Period	Equation Used for Calculation (with values inserted)	Amount Accrued After 10 Years
Annual	A =	$
Quarterly	A =	$
Monthly	A =	$
Daily	A =	$

Answer 1

Given Information:-

Principal (P) = $1,000

ARP (r) = 4.5%

Time (t) = 10 years

Equation Used for Calculation:-

nt A P 1+

Where,

A = Final amount

P = Principal

r = ARP

n = Compounding Period

t = Time

Compounding Period	Equation Used for Calculation (with values inserted)	Amount Accrued After 10 Years
Annual	A =   1X10 4.5% 1000 1	$ 1,552.97
Quarterly	A =   4X10 4.5% 1000 1 4	$ 1,564.38
Monthly	A =   4.5%11210 1000 1 12	$ 1,566.99
Daily	A = 365X10 4.5% 1000 1 365	$ 1,568.27