Question: Assume you needed $10 000 on April 1, 2006, and two options were available:
(a) Your banker would lend you the money at an annual interest rate of 7.0%, compounded monthly, to be repaid on September 1, 2006.
(b) You could cash in a certificate of deposit (CD) that was purchased earlier.
The cost of the CD purchased September 1, 2005, was $10 000. lf left in the savings and loan company until September 1, 2006, the CDs annual interest is 3.8% compounded monthly. If the CD is cashed in before September 1, 2006, you lose all interest for the first three months and the interest rate is reduced to 1.9%, compounded monthly, after the first three months. Which option is better and by how much? (Assume an annual rate of 3.6%, compounded monthly, for any funds for which an interest rate is not specified.)