1. Which short-term investment is most appropriate for Sandras situation? 2. Assuming Sandra remains unsure as to...
Question:
1. Which short-term investment is most appropriate for Sandra’s situation?
2. Assuming Sandra remains unsure as to what she will do with the $1000, does it really matter if Sandra puts her $1000 in a “rainy day” fund or a “car purchase” fund?
Sandra Chan, 22, has just moved to Winnipeg to begin her first professional job. She is concerned about her finances and, specifically, wants to save for a “rainy day” and a new car purchase in two years. In order to finance her move, Sandra had put aside some money. Now that her move is finished, Sandra has $1000 remaining in her chequing account at the bank. Sandra is unsure if she should put this money aside in a “rainy day” fund, or if she should put this money aside for a new car purchase. Sandra has reduced her savings options to four choices:
a. Leave the $1000 in her chequing account where it will earn 0.25 percent per year.
b. Deposit her $1000 in an online investment savings account where she will earn 1.35 percent per year.
c. Invest her $1000 in a Canada Premium Bond that pays interest of 1.00 percent per year.
d. Invest her $1000 in a 2-year GIC that pays interest of 1.50 percent per year.
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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price.
Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
