You have $50,000 saving and are considering 30 year investment which offers in two phases: Phase 1: investing that $50,000 as a lump sum in an investment in the securities market for 20 years. Your securities broker recommends two alternative options.option A pays interest rate of 11.87% compunding daily. Option B pay interest rate of 12% compounding quarterly. Phase 2: At end of 20 year, putting total amount accumulated in the first phase into another investment.

Which will pay you equal income at the end of each year for 10 years.

Required: 

A) identify which option should you choose in phase 1 by computing the effective annual interest rate(EAR)? 

B) Calculate the annual of money you would accumulate in phase 1 after 20 years if you choose option ? 

C) If you would like to have exactly $600,000 after 20 years , how much the investment rate in return ( compounding annual) should be? 

D)Assume that after 29 years, you putt totally $500,000 in the investment in phase 2 , calculate the amount of yearly income would you receive each year for 10 years of the required rate of return is 12.5% compounding annually? 

E) In phase 2, assume the payment of income is changed to 74,000 per year forever. Calculate the rate of return would you get from the investment?

Answer rating: 100% (QA)

A To compare the two options we need to calculate the effective annual interest rate EAR of each option Option A EAR 1 01187365365 1 01227 or 1227 Opt... View the full answer