EXPECTED INFLATION FOR THE NEXT 5 YEARS WILL AVERAGE 5% PER YEAR. YOU HAVE $100,000 TO MAKE A LONG-TERM PASSIVE INVESTMENT (THAT WILL GENERATE RENTAL/PASSIVE INCOME).

YOU ARE CONSIDERING THE FOLLOWING OPTIONS: 1) BONDS, NOMINAL VALUE $100,000, COUPON INCOME 6% PER YEAR (NO COMPOUND INTEREST) 2) BANK DEPOSIT, RATE 5%, (WITH COMPOUND INTEREST) 3) CORPORATE PREFERRED SHARES. EXPECTED DIVIDENDS ARE 1.5% PER YEAR OF THE MARKET PRICE, WITHOUT REINVESTMENT. STOCKS ARE EXPECTED TO RISE IN VALUE FASTER THAN INFLATION; THEIR NOMINAL GROWTH WILL AVERAGE +7% PER YEAR 4) REAL ESTATE FOR RENT. RENTAL INCOME AFTER TAXES WILL BE 3.5% OF REAL ESTATE MARKET VALUE PER ANNUM, WITHOUT REINVESTMENT. THE MARKET PRICE OF REAL ESTATE ITSELF WILL GROW AT THE LEVEL OF INFLATION.

IT IS ASSUMED THAT ALL THESE INVESTMENT OPTIONS HAVE LOW RISKS. PLEASE CALCULATE: A) THE TOTAL ACCUMULATED INFLATION OVER 5 YEARS; B) ACCUMULATED FUTURE VALUE FOR EACH INSTRUMENT, NOMINAL, IN FIVE YEARS; C) PRESENT REAL VALUE FOR EACH INSTRUMENT, ADJUSTED TO INFLATION (ACCUMULATED FV/ INFLATION); D) WHICH INVESTMENT INSTRUMENT GIVES THE BEST REAL RETURN OVER 5 YEARS? E) FOR EACH INVESTMENT CALCULATE EFFECTIVE RATE, ADJUSTED TO INFLATION, TO MAKE IT COMPARABLE WITH COMPOUNDED INTEREST RATE OF A BANK DEPOSIT (USE GEOMEAN OF REAL ROI) F) IF YOU USE 100% LEVERAGE (LOAN) FOR INVESTMENT, THAT IS, IN THE AMOUNT OF 100,000, WHICH MUST BE RETURNED AFTER 5 YEARS, AND INTEREST ON IT IS PAID SIMPLE, 5% PER YEAR, WHICH OF THE INVESTMENT INSTRUMENTS REMAINS PROFITABLE FOR YOU?