Question

5. You have two opportunities to invest $5,000 for 10 years. The first provides a yield of 8% annually, compounded quarterly. The second provides a yield of 8.5% annually, compounded annually. Which of these investments provides the highest returns? By how much? 6. Which would you prefer -- $10,000 now, $20,000 10 years from now, or $30,000 20 years from now, assuming a. a 6% annual interest rate? b. an 8% annual interest rate? c. a 10% annual interest rate? 7. You have the opportunity to purchase a note that still has 4 years to run. It pays $750 per year, with the first payment due 1 year from now. It can be purchased for $2,700. Should you buy the note, assuming you can earn 6% on an alternative investment?

Answer 1

Q5	Future value of option 1	$11,040.20
	Future value of option 2	$11,304.92
	Option 2 gives higher returns
	Difference in returns	$264.72
Q6	Options	10000 now	20000 after 10 years	30000 after 20 years	Preference
	PV at 6% rate	$10,000.00	$11,167.90	$9,354.14	20000 after 10 years
	PV at 8% rate	$10,000.00	$9,263.87	$6,436.45	10000 now
	PV at 10% rate	$10,000.00	$7,710.87	$4,459.31	10000 now
Q7	PV of the note	$2,598.83
	Cost of the Note	2700
	Hence do not buy the note

Workings