Answer:
a.
Value of deposit = $58.3
b.
We can borrow approx $54.72 today if we are to pay bank $58 in one year from now.
c.
The return provided by bank for a deposit of $55 is an interest of $3.3 (58.3 - 55) while the return provided by lending to a friend is $3 (58 - 55). So, the money should be deposited in the bank.
Explanation:
a.
The interest offered by the bank is at 6% which we assume is the simple interest rate. To calculate the value one year from now of $55 deposited in the bank at 6%, we can use the following formula,
Value of deposit = Principal + Interest
Where,
Interest can be calculated as = Principal * interest rate
So,
Value of deposit = 55 + 55 * 0.06
Value of deposit = $58.3
We would have $58.3 one year from now if deposited in the bank.
b.
To calculate the money that can be borrowed today for a one year later payment of $58 can be calculated using the present value formula,
Present Value = Future Value / (1+i)^t
Present value = 58 / (1+0.06)^1
Present value = 54.71698113 rounded off to $54.72
So, we can borrow approx $54.72 today if we are to pay bank $58 in one year from now.
c.
The return provided by bank for a deposit of $55 is an interest of $3.3 (58.3 - 55) while the return provided by lending to a friend is $3 (58 - 55). So, the money should be deposited in the bank.
