Question

SOLVE USING EXCEL SOLVER

In anticipation of the immense college expenses of their child, a couple has started an annual investment program on the child's eighth birthday that will last until the eighteenth birthday. Judging from their expected financial position over the next 10 years, the couple estimates that they will be able to invest the following amounts at the beginning of each year:

Year	1	2	3	4	5	6	7	8	9	10
Amount ($1000)	20	20	25	25	30	35	35	40	40	50

To avoid unpleasant surprises, the couple opts to invest the money very safely. The following options are open to them:

1. Insured savings with 7.5% annual yield.
2. Six-year government bonds that yield 7.9% and have a current market price equal to .98 face value.
3. Nine-year municipal bonds yielding 8.5% and having a current market price equal to 1.02 face value (you pay $1.02 to buy the bond worth $1.)

How should the couple invest the money over the next 10 years? (Hint: more than $460K)

Answer 1

Yield is the overall return of an investment on a bond.

So, Out if insured savings, government bonds and municipal bond. Municipal Bond is giving the highest return.

Additionally, municipal bonds are exempt from federal tax. So, municipal bonds will give the highest return.

So, the couple should invest their money into municipal bond.