2. Suppose you currently have $3,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 2% interest compounded annually. How much will you have when the CD matures

The value of the CD would probably be $3183.62 in three years as shown below.

Explanation:

The formula applicable here is future value, which means the value of the investment in 3 years at 2% compound interest rate.

The formula is given as:

FV=PV * (1+r) ^n

FV is the unknown here

PV is the present value of the amount to be invested which is $3000

r is the rate of return on investment at 2%

n is the time horizon of the investment which is 3 years

FV=$3000 * (1+0.02) ^3

FV=$3183.62

In other words, by investing in the certificate of deposit, the investor would likely have $3183.62 in three years' time.

The rate on certificate of deposit is usually low because it is one the safest investment vehicle, hence offers a lower rate of return, that shows clearly the positive relationship between risk and return on investment