Question
Question 4 (25 marks) David Lam is about to retire, his company offers him three retirement plan options: Plan 1 A lump sum payment of
| Question 4 | (25 marks) |
David Lam is about to retire, his company offers him three retirement plan options:
| Plan 1 | A lump sum payment of $1,000,000 in cash. |
| Plan 2 | A government bond with par value of $1,000,000 that will mature in ten years. The bond gives annual coupon of $70,000 for the next ten |
|
| years. |
| Plan 3 | His companys common stock, which is currently valued at $1,000,000. The stock has a steady dividend of $8,000 per year. While there is no guarantee, the stock price is expected to rise 10% per year. |
Assume that the money market interest rate is 3% per year and that he does not need to pay tax on the coupon income and stock appreciation. He will also put the coupon and dividend income into a money market instrument.
| (a) | Critically discuss the advantages and disadvantages of each retirement plan. | (10 marks) |
| (b) | Analyse the future value of each plan in ten years and suggest which plan David should choose. | (10 marks) |
| (c) | Discuss how is the Mandatory Provident Fund (MPF) schemes in Hong Kong differ from these plans above. | (5 marks) |
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Numerical Methods In Finance
Authors: René Carmona, Pierre Del Moral, Peng Hu, Nadia Oudjane
2012th Edition
3642257453, 978-3642257452
