Identify the best alternative out of the two assets

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Reference no: EM133379682

Assume you are a financial adviser. Rajani, one of your clients, approached you for a consultation about her plan to make a savings target of $350,000 for her child's higher education in the United States of America 10 years from now. Rajani has savings of $150,000 and is considering alternative investment options:

Option 1: Invest $150,000 in an asset in the financial market for 10 years. There are two assets of her choice.

Asset A pays a rate of return of 8.5% per year, compounding semi-annually.

Asset B pays a rate of return of 8.45% per year, compounding quarterly.

Option 2: Contribute exactly an equal amount of money to the Global Growth Investment Fund at the beginning of each month for 10 years to accumulate $200,000 at the end of the 10-year period. The fund is offering a rate of return of 7% per year, compounding monthly.

Required:

a) Based on the effective annual interest rate (EAR), identify the best alternative out of the two assets given under option 1.

b) Briefly discuss the importance of EAR in financial decision-making

c) Calculate Rajani's total wealth at the end of 10 years if she chooses asset B in option 1

d)Based on the information given under option 2, how much should Rajani contribute monthly to Global Growth Investment Fund to reach her investment target of $200,000 in 10 years?

Reference no: EM133379682

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