Reference no: EM133069601

An insurance company is offering a new product in the market. This policy is intended to be bought by a parent for their child at birth. The purchaser shall make five annual payments, starting with $1,000 on the child's first birthday and increasing $200 in subsequent years. No further payments are required. When the child reaches the age of 60, he or she will receive $100,000. The annual interest rate is 5%.

(d) Judge whether this policy is worth buying.

You are trying to choose among three investments described below:

• Investment A: Up-front investment of $45,000 and returns $120,000 in six years.
• Investment B: Up-front investment of $60,000 and returns $8,000 per year forever.
• Investment C: Invest $10,000 per year for three years starting today and returns $15,000 each year for 10 years starting at the end of year 8.

(e) Prioritize the investments in the order of return.

Raffles Bank pays 4% simple interest on its deposit account, whereas Bugis Bank pays interest on its deposit account compounded monthly.

(f) Formulate the quoted and effective interest rates that Bugis Bank should set if it wants to match Raffles Bank, assuming a 5-years horizon period.