Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period. What nominal rate of return will Hugh earn if he invested in option 1?
A) 0.79%
B) 3.22%
C) 0.32%
D) 6.67%

Question

Hugh Wallace has the following information regarding three investment options.Each investment option involves the same one-year period.  What nominal rate of return will Hugh earn if he invested in option 1?
A) 0.79% 
B) 3.22% 
C) 0.32% 
D) 6.67%

Quizplus · Accepted Answer

To calculate the nominal rate of return for option 1, we use the formula: Nominal Rate = (Ending Value - Beginning Value) / Beginning Value
Nominal Rate for Option 1 = (1000 - 980) / 980 = 0.0204 or 2.04%
For option 2, we are given the nominal rate, so it is easy to calculate the ending value:
Ending Value = Beginning Value x (1 + Nominal Rate) = 1000 x 1.02 = 1020
Nominal Rate for Option 3 = ((1100 / 1000)^(1/4)) - 1 = 0.0244 or 2.44%
Comparing the three options, option 2 offers the highest nominal rate of return (2.04% for option 1, 2.1% for option 2 and 2.44% for option 3), so it is the best choice.

Hugh Wallace Has the Following Information Regarding Three Investment Options