A company intends to set aside funds to cover for the following future expenses payable during the next 15 years: • £500 payable monthly in arrears for the first 10 years; £5,000 per year payable quarterly in arrears for the remaining 5 years. The first investment option the company is considering would pay an effective annual interest rate of 4.5% throughout the entire 15-year period. Alternatively, another investment plan that is available pays compound interest at the rates of: • 3.6% per annum nominal convertible monthly for the first 5 years, and 6% per annum nominal convertible quarterly for the remaining 10 years. Calculate the following: (i) The amount of funds that the company would need to invest at t = 0 under these two options. (ii) The investment option the company should choose, and the corresponding amount of saving at t = 0 it would make compared to using the other method.
A company intends to set aside funds to cover for the following future expenses payable during the next 15 years: • £500 payable monthly in arrears for the first 10 years; £5,000 per year payable quarterly in arrears for the remaining 5 years. The first investment option the company is considering would pay an effective annual interest rate of 4.5% throughout the entire 15-year period. Alternatively, another investment plan that is available pays compound interest at the rates of: • 3.6% per annum nominal convertible monthly for the first 5 years, and 6% per annum nominal convertible quarterly for the remaining 10 years. Calculate the following: (i) The amount of funds that the company would need to invest at t = 0 under these two options. (ii) The investment option the company should choose, and the corresponding amount of saving at t = 0 it would make compared to using the other method.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Using formulas, no tables. Hint: Correct interpretation of the CF, Showing detailed EV expressions and full workout
Transcribed Image Text:A company intends to set aside funds to cover for the following future expenses payable
during the next 15 years:
• £500 payable monthly in arrears for the first 10 years;
£5,000 per year payable quarterly in arrears for the remaining 5 years.
The first investment option the company is considering would pay an effective annual
interest rate of 4.5% throughout the entire 15-year period. Alternatively, another investment
plan that is available pays compound interest at the rates of:
•
3.6% per annum nominal convertible monthly for the first 5 years, and
6% per annum nominal convertible quarterly for the remaining 10 years.
Calculate the following:
(i) The amount of funds that the company would need to invest at t = 0 under these two
options.
(ii) The investment option the company should choose, and the corresponding amount
of saving at t = 0 it would make compared to using the other method.
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