Question 1 (50%): elaborate on the answers
a. You want to borrow money and the bank offers an annual interest rate of 7.3% compounded monthly. What is the equivalent Effective Annual Rate (EAR)? (10%)
b. A broker is presenting you with two different investment
opportunities. Which one would you choose to invest it and
Opportunity A: Invest $13,000 today and receive $20,000 after 8 years from now.
Opportunity B: Invest in a financial instrument that will provide you with a 7.3% return per year for the same time period. (20%)
c. A fellow investor has invested $100,000 with a return of 5.3% for the next 5 years. You want to have the same profit as him/her but the available investment you can choose only offers 4% return. How much money should you invest in order to have the same profit as your fellow investor?
Calculation of effective annual rate:
annual rate=7.3% or .073
Effective annual rate=[(.073/12)+1]12-1
=.0755 or 7.55%
(b) Opportunity A:
r=.0553 or 5.583%
as the rate of return in oppotunity B is more than that in A therefore opportunity B is more benificial.
(C) future value (FV)of 100000 invested at 5.3% rate:
Let amount to be invested by you be x.
hence amount to be invested =135948
Hence 135948 if invested at 4% rate will render a gain of 29453.53 which is approximately equal to 29461.86.
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