You are considering a 10 year investment plan in which your target is $150,000. There are two options available for you:
Option 1: Putting exactly an equal amount of money into an investment fund at the end of each year for 10 years with the rate of return of 8%, annually compounding.
Option 2: Putting your initial investment of $50,000 in an asset that will pay you 9% rate of return, compounding quarterly for the first 6 years. The rate of return, compounding annually for the last 4 years (the period from year 7 to the end of year 10) has not been defined yet.
Required:
a) Calculate the amount of money you should put into your investment fund each year in Option 1? (4 marks)
ANSWER:
b) Compute the effective annual interest rate (EAR) in the first 6 years in Option 2? (2 marks)
ANSWER:
c) Compute the annually compounding rate of return you should target for your asset in the following 4 years to get $150, 000 at the end of year ten in Option 2? (4 marks)
ANSWER:
d) If a firm decides to go public on the stock market, what type of financial institution would help the firm to issue shares and sell them to public investors? (1 mark)
ANSWER d):
