Question 2

You are considering a 10 year investment plan in which your target is $150,000. There are two options available for you:

Option 1: Putting exactly an equal amount of money into an investment fund at the end of each year for 10 years with the rate of return of 8%, annually compounding.

Option 2: Putting your initial investment of $50,000 in an asset that will pay you 9% rate of return, compounding quarterly for the first 6 years. The rate of return, compounding annually for the last 4 years (the period from year 7 to the end of year 10) has not been defined yet.

Required:

a. Calculate the amount of money you should put into your investment fund each year in Option 1? 4 marks

b. Compute the effective annual interest rate (EAR) in the first 6 years in Option 2? (2 marks)

c. Compute the annually compounding rate of return you should target for your asset in the following 4 years to get $150, 000 at the end of year ten in Option 2? (4 marks)

d. If a firm decides to go public on the stock market, what type of financial institution would help the firm to issue shares and sell them to public investors? (1 mark)