Question

As the Fund Manager for Bank of Trinidad and Tobago Limited, you are to advise the following two (2) clients based on their respective financial situations. a. Your best friend has asked to assist him in making the best investment out of the following options. Which would you advise him to choose and why, considering the risks are the same for all the options. Show all workings to support your answer.

Option 1: $12,000 in 5 years at 6 percent interest.

Option 2: $15,000 in 2 years at 9 percent interest.

Option 3: $15,000 today. No strings attached.

Option4: $5,000 each year for 2 years at 7 percent interest compounded semiannually.

Answer 1

We will find the present value of all options options which has highest present value that investment should be preferred

Option 1) 12000 in 5 years at interest of 6%

P.v = f.v/(1+r)^n

= 12000/(1.06)^5 = 8967

Option 2) 15000 in 2 years at 9% interest

P.v = 15000/(1.09)^2 = 12625

Option 3) 15000 today so p.v is 15000

Option 4) 5000 for 2 years at 7% compounding semi annually

Interest per period is 7/2 = 3.5%

P.v = 5000/(1.035)^2 + 5000/(1.035)^4

= 9024

So third option has maximum value so it should be taken