Question

) Having recently inherited some money from a distant relative, you are considering investing the funds in financial assets. You are aware that financial assets exhibit four main attributes. List and discuss these attributes. In your answer give examples to explain your points.                                                                                              (Marks 4)

(b) John is going to retire in 10 years. He is planning to build a retirement fund that he would like to receive at the end of 10 years from now. Company X offers a package of two investment opportunities - A1 and A2. John will have to make separate investments in A1 for 10 years and A2 for 5 years. The investment in A1 should start now, however the investment in A2 will start in 6th year. Both investments (A1 and A2) will mature at the same time at the end of 10th year. The details of the A1 and A2 investment plans are as follows:

Investment A1: The required investment at present is $80,000.00 which will go through 4 following phases (phase 1 to 4) in next 10 years. At the end of each phase the entire fund will automatically be rolled over to the next phase for re- investment. The investment will mature at the end of phase 4. The 4 phases are as follows:

Phase 1: During the first 2 years the investment will earn 12% p.a. simple interest, then roll over to phase 2;

Phase 2: In the following 3 years the investment will earn 12% p.a. compounding monthly, then roll over to phase 3;

Phase 3: In the following 3 years the investment will earn 8% p.a. compounding annually, then roll over to phase 4;

Phase 4: The final 2 years of the investment will earn 10% return p.a. compounding daily. The investment matures at the end of phase 4.

Investment A2: This investment is spread over 5 years. It will commence in the 6^th year of the 10 year investment plan. A2 requires an investment of $10,481.00 at the end of each quarter for 5 years, which will earn a 12% p.a. return compounding quarterly.

Both investments in A1 and A2 will mature at the end of the 10th year. How much, in total, will John accumulate from both investment opportunities at the end of 10^th year? Explain why the returns from each investment are different.

(Assume 1 year = 12 months = 52 weeks = 365 days).

Answer 1

So accumulated amount from A1 = 218,373.23

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And accumulated amount from A2 = 281,628.39

So as we see that accumulated amount at the end of 10th year from A1( $218,373.23) < A2 (281,628.39).

So A2 is a better option to go for. The Compounding of interest makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period. Here the rate of interest for compounding is higher in A2 and also quarterly, that has impacted to give a higher returns in a duration of 5 years.

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