When comparing different securities like CDs bonds and common stocks briefly explain why it is important to know what interest rate should be used in that comparison?

Michael Serpe 26 Mar 08 3:03 PM MST When you compare different securities it is very important to know what interest rate that is used in comparison. There are many different CD's, Bonds and tons of different stocks to chose from. You obviously want one that will give you the best rate of return for the amount of money you invested.

Example:

Bond A has a present value of $200 and a compound interest rate of 5% and the length of the bond is 50 years.

Bond B has a present value of $200 and a compound interest rate of 10% and the length of the bond is 25 years.

The future value of Bond A would be:

FVn = PV(1+I)n or ??? = $200(1+5%)n

??? = $200(1.05)to the 50th

??? = $200(11.46)

FV = $2293.48

The future value of Bond B would be:

FVn = PV(1+I)n or ??? = $200(1+10%)n

??? = $200(1.10)to the 25th

??? = $200(10.83)

FV = $2166.94

Then if you were to reinvest the money again for Bond B with the PV = $2166.94, you would have $23,478.16 instead of just the $2293.48 from Bond A.

The basic idea of knowing the interest rate is to get the best return on your investment over the same amount of time as other options.