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You have just inherited $10,000 and are researching options to invest this amount for 5 years. Your options are: 1. Purchase a Certificate of Deposit
You have just inherited $10,000 and are researching options to invest this amount for 5 years. Your options are: 1. Purchase a Certificate of Deposit that pays 2% annual interest, compounded. 2. Purchase a bond that pays 1% annual interest, semiannually, compounded. 3. Deposit the amount in a checking account which pays 6% annual interest, quarterly, compounded. Questions for Scenario 1 a. Calculate the returns of each of the above options at the end of the 5 years. Show your calculations for each option. b. Then, answer this question: Based solely on the amount of the return, which option would you choose? Explain why you selected that option. Scenario 2: Your goal is to purchase a home in 3 years and will need a down payment of $20,000. You want to know how much you would need to invest/save today in order to achieve your down payment goal under the following options: 1. Purchase a Certificate of deposit that pays 10% annual interest, compounded. 2. Purchase a bond that pays 2% annual interest, semiannually, compounded. 3. Deposit the amount in a checking account that pays 6% annual interest, quarterly, compounded. Questions for Scenario 2 a. Calculate the amount that you would need to invest/save today under each option to achieve your down payment goal in 3 years. Show your calculations for each option. b. Based solely on the amount needed to be invested today, its present value, which option would you choose? Explain why you selected that option
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