Suppose you have $25,000 which is currently in a CD at your bank and is about to

Question

Suppose you have $25,000 which is currently in a CD at your bank and is about to mature. As an alternative to rolling the money over into a new two-year CD paying 1.15% annual interest (this rate is the same as what you would receive from another bank), you are considering investing the entire amount for at least two years. You have identified four possible investments, all of which have active secondary markets in case you want to sell them at any point after two years. Ignore investing costs such as commissions and taxes in your answer.

SOLVE: Investment 1 is 5 three-year discount municipal bonds which cost exactly $5,000 each and will repay all interest and principal ($5,000 per bond) in a lump sum at maturity. The current market rate on similar bonds is 1.75%.

Explanation / Answer

Present value of discount bond = $5000/(1+.0175)^5 = $4584.563 Total value = $4584.563 * 5 = $22922.82

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.