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Comparing the effective annual rate

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Suppose someone offered to sell you a note that calls for a $1000 payment 15 months from today. The person offers to sell the note for $850 in a bank deposit (savings instrument) that pays a 6.76649% simple rate with daily compounding, which is 7% effective annual rate; and you plan to leave this money in the bank unless you buy the note. The note is not risky-that is, you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your future value if you buy the note versus leaving your money in the bank. (2) by comparing the PV or the note with your current bank investment, and (3) by comparing the effective annual rate on the note of the bank investment.

Reference no: EM131412923

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