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.

• Investment 2 is 25 ten-year corporate coupon bonds which cost $1,000 each and will pay annual interest with the par value ($1,000) repaid at maturity. The coupon interest rate on the bonds is 3.5% (paid semiannually) and the current market rate on bonds of a similar credit rating is 4.25%.

Explanation / Answer

nper = 10*2 =20 fv = $1000 pmt =( 1000* .035)/2 = 17.5 rate = 4.25%/2 = 2.125 PV(rate,nper,pmt,fv) PV(.02125,50,-17.5,-1000) =$939.42 Total value = 25*$939.42 = $23,485.39

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