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Xavier has just inherited $75,000. He plans to put the money in an interest account for one year while he researches other investment options. Xavier

Xavier has just inherited $75,000. He plans to put the money in an interest account for one year while he researches other investment options. Xavier has come to you to help him decide which temporary investment option is better. The following are the two investment options he is considering:

  • Option 1: Interest account earning 3.05% p.a. with quarterly compounding.
  • Option 2: Interest account earning 3.0% p.a. with monthly compounding.

All interest will be paid upon maturity. Ignore taxes.

Required

  1. What is the value of each option after one year? Which investment option do you recommend?

  1. Under what conditions is the effective annual rate (EAR) the same as the annual percentage rate (APR)?

  1. During your discussion with Xavier, you have compiled the following Net Worth Statement:

Xavier Net Worth Statement May 2021

Assets

Cash

Car

Home

3,000

6,000

675,000

684,000

Liabilities

Credit card A, 19%

Credit card B, 15%

Student loan, 9%

Mortgage

8,000

4,000

17,000

445,000

474,000

Net Worth

210,000

Based on this additional information, provide Xavier with two personal finance recommendations. (6 marks)

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