If you could earn $100 or $10 for doing the same job, which would you take? Chances are, you’d take the $100. While that seems like an easy choice, understanding how you can earn $100 versus $10 when investing money means mastering interest and rate of return. Learn how different rates, interest types and investment strategies can impact and maximize your earnings by completing the table and questions below.
Strategy Principal Interest Rate Time Interest or Interest or Total
Return Type Return Earned Value
Stock $10,000 3 % 10 years Compound $300 $13,439.16
Mutual Fund $1,000 7 % 20 years Compound $70 $3,869.68
(portfolio of
stocks & bonds)
Bond $100 5 % 30 years Simple $5 $150
Stock $700 10 % 1 year Compound $70 $770
Bond $10,000 3 % 10 years Simple $300 $3000
Investment Challenge
1. John receives $1,000 as a graduation gift from his grandparents. Rather than spend it, he decides to invest it in a two-year bond that earns 3% simple interest. John doesn’t need access to the money right away because he wants to save it for when he’s ready to buy a home in about 10 years. Is the bond a wise investment for John? Why or why not?
The bond doesn’t sound like it’s a wise investment for John because he’s using a two year bond for something he’s not going to access for 10 years.
What other investment options does John have?
John could find a way to invest his money into a 10 year bond with any form of interest.
2. If you had the choice between investing $1,000 in a mutual fund that earns 7.5% compound interest or a bond that earns simple interest at 7.5%, which would you prefer and why?
I would prefer the mutual fund that earns 7.5% compound interest because it earns more money than the bond with the 7.5% compound interest.
Strategy Principal Interest Rate Time Interest or Interest or Total
Return Type Return Earned Value
Stock $10,000 3 % 10 years Compound $300 $13,439.16
Mutual Fund $1,000 7 % 20 years Compound $70 $3,869.68
(portfolio of
stocks & bonds)
Bond $100 5 % 30 years Simple $5 $150
Stock $700 10 % 1 year Compound $70 $770
Bond $10,000 3 % 10 years Simple $300 $3000
Investment Challenge
1. John receives $1,000 as a graduation gift from his grandparents. Rather than spend it, he decides to invest it in a two-year bond that earns 3% simple interest. John doesn’t need access to the money right away because he wants to save it for when he’s ready to buy a home in about 10 years. Is the bond a wise investment for John? Why or why not?
The bond doesn’t sound like it’s a wise investment for John because he’s using a two year bond for something he’s not going to access for 10 years.
What other investment options does John have?
John could find a way to invest his money into a 10 year bond with any form of interest.
2. If you had the choice between investing $1,000 in a mutual fund that earns 7.5% compound interest or a bond that earns simple interest at 7.5%, which would you prefer and why?
I would prefer the mutual fund that earns 7.5% compound interest because it earns more money than the bond with the 7.5% compound interest.