Question:

You recently received a bonus of $8,000 and are thinking of investing this sum of money for your retirement 20 years later. Sandy Chen, your financial planner, approached you recently an offered two investment products. Product Aee will earn an annual return of 5% per year for the first 5 years. If there is no recession in Singapore during 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 Bee 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 Business Times, economists have predicted that there will be a 70% chance of a recession happening over the next several years.

(e) Determine and justify which investment product you should choose. State any assumptions made.