Question

In: Finance

You have $5,000 to invest for the next year and are considering three alternatives: A money...

You have $5,000 to invest for the next year and are considering three alternatives: A money market fund with an average maturity of 30 days offering a current yield of 2.0% per year A 1-year savings deposit at a bank offering an interest rate of 4.0% A 20-year U.S. Treasury bond offering a yield to maturity of 4.0% per year A 20-year corporate bond offering a yield to maturity of 7. What is the risk profile of each of these assets? What role does your forecast of future interest rates play in your decisions?

Solutions

Expert Solution

Money Market fund:

This is a highly risky investment but the liquidity is very high. However, the returns are very average, hence not worth the risk it ensues.

Savings Bank Deposit:

There is no risk whatsoever. However the lock-in period of the fund is higher than that of the money market fund. The returns are just about enough to beat inflation rates.

US Treasury Bond:

This is another investment option with very low risk. However, the lock-in period of 20 years means that the capital is stuck for a long period of time. However, the time value of money will ensure that the compounded return will give a princely sum on maturity.

Considering all these factors, we can easily say that if the money is idle and will not be required for a long time( basically sums like retirement corpus), then the Treasury Bond is the best option. However, if the investor is okay to highly risky options, then the Money Market Fund could be the option.

jeff jeffy answered 6 months ago
Next > < Previous

Related Solutions

You have $5,000 to invest for the next year and are considering three alternatives a) A...
You have $5,000 to invest for the next year and are considering three alternatives a) A money market fund with an average maturity of 30 days offering a current annualized yield of 3%. b) A two-year CD at a bank offering an interest rate of 4.5% c) A 20-year U.S. Treasury bond offering a yield to maturity of 6% per year. What role does your forecast of future interest rates play in your decision?
A firm is examining some alternatives to invest their money. All the alternatives have the same...
A firm is examining some alternatives to invest their money. All the alternatives have the same useful life, 10 years. The interest rate is 7% and the firm has a flat tax rate of 31%. The options are summarized in the following table. Alternatives First Cost Annual Costs Annual Benefits Dep. Method A $17,000 $900 $4,500 SL B $25,000 $1,050 $3,250 SOYD C $22,000 $1,125 $5,125 MACRS (7-yr) What is the after-tax IRR for project A? What is the after-tax...
You have extra $5,000 to invest. You do not need the money now but will need...
You have extra $5,000 to invest. You do not need the money now but will need it after 3 years, so you plan to cash your investment at the end of 3 year. Usually your investments earn 7% annual interest compounded annually and you’d like to consider it as your minimum acceptable rate of return. You are considering several investment opportunities: Option 1. Depositing your money on the high interest savings account that earns 0.58% interest each month. Option 2....
You are planning to invest 3 million euros for one year, and you have two alternatives:...
You are planning to invest 3 million euros for one year, and you have two alternatives: a US asset with interest rate 1.9%, and a French asset with interest rate 0.9%. Note also that today’s euro nominal exchange rate per $ equals 0.920. a) If you expect annual depreciation of the euro by 4%, what will be your choice? b) Which expected nominal exchange rate will make you indifferent between the two alternatives? B. The economic report for a Eurozone...
You have received a year-end bonus of $5000. You decide to invest the money in the...
You have received a year-end bonus of $5000. You decide to invest the money in the stock market and have narrowed down your options to two mutual funds. This data represent the historical quarterly rates of return for each mutual fund for the last five years. Describe each data set using words related to shape, center, and spread. Which mutual fund would you choose to invest in, and why? Mutual Fund A Mutual Fund B 1.3 -5.2 -0.3 6.7 0.6...
Suppose you invest $5,000 today, and plan on continuing this contribution for the next 15 years....
Suppose you invest $5,000 today, and plan on continuing this contribution for the next 15 years. Afterwards, you are going to stop contributing to the account, but you will not need the money for another 25 years. Assuming that you can earn 8% on this account for the life of the account, how much will you have at the end of this period?  
If you had $5,000 to invest, would you rather put your money in a mutual fund,...
If you had $5,000 to invest, would you rather put your money in a mutual fund, an index fund, or an exchange traded fund (ETF)?  Carefully explain the pros and cons of each indirect finance method.               
You are considering a project that costs $500 to invest in today, and will pay you $100 next year, $50 in two years, and $100 in three years.
You are considering a project that costs $500 to invest in today, and will pay you $100 next year, $50 in two years, and $100 in three years. The cash inflow will grow at a constant rate of 3% per year after year 3, and you will receive cash inflows for 25 years (total including the first three CFs). Your discount rate is 14%. What is the NPV of the project? Also, what would the NPV be if the cash...
You are considering a project that costs $500 to invest in today, and will pay you $100 next year, $50 in two years, and $100 in three years.
  You are considering a project that costs $500 to invest in today, and will pay you $100 next year, $50 in two years, and $100 in three years. The cash inflow will grow at a constant rate of 3% per year after year 3, and you will receive cash inflows for 25 years (total including the first three CFs). Your discount rate is 14%. What is the NPV of the project? Also, what would the NPV be if the...
Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same...
Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same start-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year for eight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. The company requires a 12% return. Required: a) Which project should the company select and why? b) Which project should the company select if the interest rate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT