Question

scenario: comparing two fixed investment instruments
you have $25,000 to invest and are considering two fixed - investment options. evaluate the options based on the given criteria (interest rates, maturity periods, credit risk, inflation risks, liquidity, tax implications, minimum investment requirements, fees, and penalties) and justify your choice. use the provided formulas to calculate the potential returns.
investment options:

• investment a: 2 - year treasury note
• principal: $25,000
• interest rate: 2.5% annually
• maturity period: 2 years
• credit risk: very low
• inflation risk: low
• liquidity: high
• tax implications: exempt from state and local taxes
• minimum investment: $100
• fees and penalties: none
• formula: $i = p\times r\times t$
• investment b: 3 - year municipal bond
• principal: $25,000
• interest rate: 3% annually
• maturity period: 3 years

which investment provides a higher total return at maturity, and how much is it?
investment b with $27,250
investment a with $26,875
investment a with $26,250
investment b with $26,500

Explanation:

Step1: Calculate total return for Investment A

Use simple - interest formula $I = P\times r\times t$. Here, $P=\$25000$, $r = 0.025$ (2.5% annual interest rate), and $t = 2$ years.
$I_A=P\times r\times t=25000\times0.025\times2=\$1250$. Total return $A = P+I_A=25000 + 1250=\$26250$.

Step2: Calculate total return for Investment B

Using $I = P\times r\times t$, with $P = \$25000$, $r=0.02$ (2% annual interest rate), and $t = 3$ years.
$I_B=P\times r\times t=25000\times0.02\times3=\$1500$. Total return $B=P + I_B=25000+1500=\$26500$.

Answer:

Investment B with $26,500$