You are a young personal financial adviser. Molly, one of your clients approached you for consultation about her plan to save aside $450,000 for her child’s higher education in United States 15 years from now. Molly has a saving of $120,000 and is considering different alternative options:
Investment 1: Investing that $120,000 in a saving account for 15 years. There are two banks for her choice. Bank A pays a
Investment 2: Putting exactly an equal amount of money into ANZ Investment Fund at the end of each month for 15 years to get 330 000 she still shorts of now. The fund is offering a rate of return 7% per year, compounding monthly. Required: Work on question a, b and c only
- a) Identify which Bank should Molly choose in Investment 1 by computing the effective annual interest rate (EAR)?
- b) Calculate the amount of money Molly would accumulate in Investment 1 after 15 years is she chooses Bank B?
- c) How much is the annual interest rate, assuming compounding annually Molly should aims at if she chooses to invest her $120 000 in a saving account to get the 450,000 fund ready in just 10 years from now?
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