Question

1) Which of the first set of investment options will give the best return? a) putting $ 1,000 in an account that has a 6.5 % annual service charge and earns no interest b) buying $ 1,000 worth of euros while expecting the euro to depreciate by 7.5 % over the next year c) buying a bond for $ 1,000 with the expectation of selling it in a year for $ 950.2) Which of this second set of investment options will give the best return? a) putting $ 1,000 in an account that has a 3 % annual service charge and earns no interest b) buying a bond for $ 1,000 with the expectation of selling it in a year for $ 950 c) putting $ 1,000 in a savings account that has a 2.25 % interest rate and no service fee while expected inflation is 3.25 %

Answer 1

Answer:

c) buying a bond for $ 1,000 with the expectation of selling it in a year for $ 950

c) putting $ 1,000 in a savings account that has a 2.25 % interest rate and no service fee while expected inflation is 3.25 %

Explanation:

For the first question all are negative returns as the account will charge service but earn no interest, the euro will depreciate and the bond will be sale below par. The correct option would be do nothing and keep the 1,000 dollars but, being forced to pick among these three option then, purchase the bond is better.

For the second question the third option has an inflation which is similar to the annual service charge but, earn interest therefore will provide a better return as the interest compensate a portion of the inflation loss.