Peter wishes to save around $60,000 for his once a life time holiday in United States 5 years from now. Peterhas a saving of $35,000 and is considering different alternative options:

Option1: Putting exactly an equal amount of money into a hedge fund at the end of each month for 5 years to get 25 000 she still shorts of now. The fund is offering a rate of return 11% per year, compounding monthly.

Option 2: Investing that $35,000 in a saving account for 5 years. There are two banks for her choice. Common Wealth Bank pays a rate of return of 10% annually, compounding semi-annually. ANZ Bank pays a rate of return of 9.85% annually, compounding monthly.

Required:

1. Calculate the monthly payment Peter needs to contribute into in Hedge Fund to get $25,000 after 5 years in Option 1? (2 marks)

ANSWER:

2. In Option1, if Peter changes to contribute $350/month to that hedge fund at the beginning of each month, how much money she would have in the fund after 5 years? (2 marks)

ANSWER:

3. Identify which Bank should Peter choose in Option 2 by computing the effective annual interest rate (EAR)? (2 marks)

ANSWER:

4. Calculate the amount of money Peter would accumulate in Option 2 after 5 years if he chooses ANZ Bank? (2 marks)

ANSWER:

5. How much is the annual interest rate, assuming compounding annually Peter should aim at if he chooses to invest her $35 000 in the saving account to get the $60,000 ready in just 4 years from now? (2 marks)

ANSWER:

6. Peter is offered another investment that will pay $8 000 each year forever. How much should she pay for this investment if the rate of return 12% applies? (1 mark)

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