Question #6198

you have 10000 which you will invest for the next four years. you are considering the following investment alternatives:
a) purchase units in a bond mutual which pays 210 interest quarterly. assume the interest is reinvested at the coupon rate
b) purchase a 4 year guaranteed investment certificate which pays 3 percent compound monthly
c) invest in a stock which promise a following cash flow
year 1 0
year 2 500
year 3 750
year 4 2000
assume that at the end of year 4, you will get back your 10000. which investment alternative do you prefer? why?

Expert's answer

You will get:

a) S = 10,000 + 210*4*4 = 13,360

b) S = 10,000*(1+12*0.03)^4

= 34,210

c) S = 10,000 + 500 + 750 + 2,000 = 13,250

So, the best

alternative is b)

a) S = 10,000 + 210*4*4 = 13,360

b) S = 10,000*(1+12*0.03)^4

= 34,210

c) S = 10,000 + 500 + 750 + 2,000 = 13,250

So, the best

alternative is b)

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