Question
Hi, i need help for the following: You recently received a bonus of $8,000 and are thinking of investing this sum of money for your
Hi, i need help for the following:
You recently received a bonus of $8,000 and are thinking of investing this sum of money for your retirement 20 years later. Az, your financial planner, approached you recently an offered two investment products.
Product Bluewill earn an annual return of 5% per year for the first 5 years. If there is no recessionduring the first 5 years, all amounts invested will earn an annual return of 7% for the next 10 years, otherwise, returns will be 3% per year.
Alternatively, Product Zoo allows you to invest $800 per year (at the beginning of each year) for the next 10 years. It will earn a return of 5% per year. This product will mature 20 years later.
Over the next two decades, the deposit rate offered by local banks is expected to be 2% per year, which is compounded daily. Whereas, lending rates are expected to be 6% per year (compounded monthly). Based on a recent article you read from papers, economists have predicted that there will be a 70% chance of a recession happening over the next several years.
(a) Calculate the amount you expect to receive at the end of 15 years for Product Blue if there is no recession during the first 5 years. (4 marks)
(b) Calculate the amount you expect to receive at the end of 15 years for Product Blue if there is a recession during the first 5 years. (3 marks)
(c) Calculate the value of Product Zoo on maturity. (4 marks)
(d) Calculate the effective interest rate of both deposit and lending rates.
(e) Determine and justify which investment product you should choose. State any assumptions made.
Thank you.
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