Alyson, another investor, has also purchased an IIP for the original price of $918.29787051119. Two years pass,

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Question:

Alyson, another investor, has also purchased an IIP for the original price of $918.29787051119. Two years pass, and Alyson has just received the annual payment of $42. She is considering selling the IIP. Again, the original information regarding IIP's has been repeated below.

Customers pay $918.29787051119 to buy an IIP.

The IIP will pay out $42 at the end of each year for 9 years

The IIP will pay out a further single payment of $1,000 after 9 years There are no further payments after this single payment at time 9. (

a) Barney is willing to purchase the IIP from Alyson. He requires a return of 6.48% p.a. effective. What is the maximum price Barney is willing to pay? Give your answer in dollars, to the nearest cent.

(b) Barney and Alyson agree on the price calculated above. Ignoring tax and any other expenses, what is the effective annual return that Alyson has made on her investment? Recall that she has received 2 payments of $42 and the sale price. Give your answer as a percentage to 4 decimal places.

(c) Suppose a different investor, Jason, offers to buy Alyson's IIP for a higher price. The sale date and other details of the sale would be completely identical to the sale to Barney described in part (a) above.Without doing any calculations and again ignoring tax and any other expenses, would Alyson be receiving a higher or lower return on her investment by selling to Jason (instead of Barney)?

a.The return for Alyson would be the same as if she sold to Barney. Since we are ignoring tax and any other expenses, then any profit (or loss) Alyson makes would mean Jason makes a corresponding loss (or profit).

b.The return would be lower than if Alyson sold to Barney. As we know, there is an inverse relationship between return/yield and price. A higher price results in a lower yield/return.

c.The return would be higher than if Alyson sold to Barney. This is because Alyson is receiving a higher price on the sale (by selling to Jason), thus causing her return to increase.

d.There would be no way to know for certain whether the return would be higher or lower without knowing the specific sale price for Jason and performing the appropriate calculation.