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.
a.Explain to the client the main differences between simple interest versus compound interest.
b.Explain the results of the three different opt

Question

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. 
 a.Explain to the client the main differences between simple interest versus compound interest. 
b.Explain the results of the three different opt

anonymous · Answer

a. the main interest is that in case of compounding, once you earned interest then this interest will also be earning interest in the next term.

compounding = receive interest on previous interest

the simple interest only gives a fixed return on the principal, no matter how long you had the money in the bank, it will be the same return every year.