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Compute the effective annual interest rate

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Question

You are working as a financial adviser. Jackson, one of your clients, approached you for a consultation about his plan to save for his daughter's education in the United States that will cost him $350,000. Jackson has a saving of $120,000 now and is considering two phases of investment:

Phase 1: Investing that $120,000 in an investment that would pay a rate of return of 9.5% annually, compounding monthly for ten years.

Phase 2: Putting $350,000 saved from phase 1 investment into a trusted investment account that will pay his daughter an equal amount of cash at the end of each week for tuition fees and living expenses for five years studying in the United States. The current interest rate the trust offers for the investment is 1.85% annually, compounding weekly.

Required:

  1. Compute the effective annual interest rate (EAR) Jackson would get in Phase 1 Investment. 
  2. Calculate the amount of money Jackson would accumulate in Phase 1 Investment after ten years.
  3. In Phase 1, if Jackson wants to have exactly $350,000 to sponsor his daughter's study in the US, what should the annual interest rate be for his investment?
  4. Calculate the weekly stipend Jackson's daughter would get from the trust fund in Phase 2 Investment.
  5. In Phase 2 investment, if Jackson would like his daughter to receive the stipend of $1,500 at the beginning of each week, how much he will need to put in the trust fund?

Reference no: EM133117292

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