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.
Option 3: 14.5% simple interest for 10 years.

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.

Question

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.
    Option 3: 14.5% simple interest for 10 years.

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.

nurali · Answer

The first option at 6% quarterly compounded for 5 years will yield the most interest for the investment.