Part I:
1. You have been asked by your friend to describe this topic. Your friend knows very little about math, but learns well with pictures and analogies. Come up with a creative way to explain the concept of "compound interest" to your friend.
2. Go to https://bankrate.com/brm/calc/savecalc.asp. If you want to save $25,000 for a down payment on a house and you have ten years to save this amount, how much would you need to save monthly to achieve this goal if the interest rate is 5% compounded monthly. What happens if you can increase your interest rate to 8%? NOTE: Enter $100 for the "How much money can you spare for your first deposit or investment".
3. Develop a personal example of compound interest that differs from the example in question 2.
Part II:
Scenario: A client comes to you for investment advice on his $500,000 winnings from the lottery. He has been offered the following options by three different financial institutions and requests assistance to help understand which option would be the best for his investment.
- Option 1: 6% compounded interest quarterly for 5 years.
- Option 2: 8% compounded interest annually for 5 years.
Write a professional memo that covers the following information:
a. Explain to the client the main differences between simple interest versus compound interest.
b. Explain the results of the three different options by showing the client the step-by-step calculations.
c. Explain which investment option is better for your client and why.
The total minimum document length should be one page.