A friend has $1,400 that he has saved from his part-time job. He will need his money, plus any interest earned on it, in six months and has asked for your help in deciding whether to put the money in a bank savings account at 5.90% interest or to lend it to Victor. Victor has promised to repay $1,470 after six months.

Required:
a. Calculate the interest earned on the savings account for six months.
b. Calculate the rate of return if the money is lent to Simone. Round your percentage answer to two decimal places.
c. Which alternative would you recommend? Explain your answer.

c. Based on the calculations alone, lending the $1,400 to Victor is better than saving in the bank, provided that there is no risk of default on the part of Victor.

Explanation:

a) Data and Calculations:

Savings from part-time job = $1,400

Interest rate in a bank savings account = 5.90%

Period of savings in the bank = 6 months

Future value of the $1,400 savings = $1,441.30

Victor repayment if $1,400 was instead lent to him = $1,470

From a financial calculator, the future value of $1,400 at 5.9% after six months is $1,441.30

Loan Amount 1400

Loan Term 0 years 6 months

Interest Rate 5.9

Compound Semi-annually

Pay Back 6 Months after

Results:

Payment Every 6 Months = $1,441.30

Total of 1 Payments = $1,441.30

Total Interest = $41.30

Interest paid by Victor = $70 ($1,470 - $1,400)

This translates to 5% for six months and 10% for 1 year

5% = ($70/$1,400 * 100)