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)