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FIN254 Assignment#3 (Based on Chapter 5)

1. Irfan Shaheb has $7000 to invest. Because he is only 25 years old, he is not concerned about the length of the investment s life. !hat he is sensitive to is the rate of return he "ill earn on the investment. !ith the hel# of his financial advisor, Irfan Shaheb has isolated $ e%ually ris&y investments, each #roviding a single amount at the end of its life, as sho"n in the follo"ing table. 'ach re%uire initial $7000 #ayment

Investment ( B + -

Single amount $ 10$00 1*500 ,)00 15000

Investment life (years) ) 15 $ 10

a. +alculate the rate of return on each of the four investments available to Irfan Shaheb. b. !hich investment "ould you recommend to him, given his goal is to ma.imi/e the rate of return. 2. 0o1nu has 1ust #ro#osed 2aily. But 2aily says she "ill only acce#t his #ro#osal if he gifts her a diamond ring. 0o1nu searched and searched and finally found the best diamond ring "hich costs $200,000. 0o1nu s ban& #ays him 103 interest annually. 0o1nu believes 2aily "ill "ait for him 4or for the ring56 12 years. 7o" much must he invest today to get the ring in 12 years8 4assume that the #rice tag of the ring "ill remain the same6 9. 0r. (nondo borro"s $250 to be re#aid in 10 years "ith 193 annually com#ounded interest. :he loan may be re#aid at any earlier #eriod "ithout any #re#ayment #enalty. a. !hat amount "ill be due if the loan is re#aid at the end of year 18 b. !hat is the re#ayment amount at the end of year 58 c. !hat amount is due at the end of the tenth year8 $. Su##ose, our 0o1nu is "or&ing e.tremely hard for his future bride and e.#ect to have $90000 at the end of year 9. :hen he #lans to invest the money for ,.*3 interest for seven more years. 7o" much money "ill he have at the end of 10 years from no"8 5. 0r. 7a1ari is #lanning for a robbery "ith his buddies that "ill ha##en at the end of t"o years. 7e e.#ects to rob and get $15,000 at that time. :hen he "ill be investing the illegal money at 103 until he has $150,000. 7o" long "ill he need to "ait from no"8 ). ;our uncle is thin&ing of investing 500,000 ta&a in a fund after 5 years giving him 193 rate of interest. 7e as&s you to find out ho" much his fund "ill become after $0 years 4"hen he #lans to retire6 from no". If he "aits another 5 years to invest the same amount ho" large that fund "ill be at the time his retirement. !hich o#tion "ill be better8

Due Date: 5th of November, 2013 (Tuesday)


If we miss the deadli e be!ause of "artal, this assi# me t would be due o the e$t available !lass day%

Additional Instructions: 1. <lease do not co#y somebody else s assignment or #rovide your solution to somebody else. If you are caught, you "ill get a /ero. 2. ;ou may submit your assignment in either hand="ritten or com#uter com#osed format. In case of com#uter com#osed format, you need to email me the soft co#y 4"ith a##ro#riate sub1ect mentioning the assignment number, your name, id, course, section, etc.6 in addition to the hardco#y submission. 9. (=$ si/e #a#er is #referred for the assignment. ( cover #age is a must. ;ou may use the sam#le cover #age that I have made available along "ith the assignment file. $. ;ou must com#lete the assignment before coming to the class on the due date. If anyone is seen doing the assignment in the class, s>he "ill get a /ero. 5. ;our assignment must loo& #rofessional. ?ther"ise you may lose mar&s. 7o"ever, this does not mean you have to do s#iral or other ty#es of binding, or use color #rinting. @ust sta#le your #a#ers and submit. ). ;ou may lose mar&s if you fail to follo" the instructions #ro#erly.
7. 2ate assignments "ould be acce#ted "ith 203 #enalty if submitted by the ne.t class, 503 #enalty if submitted later but "ithin a "ee& from the assigned date. No assignment would be accepted after a week from the submission due date.