Steve Howell Is Seeking to Select Between 2 Fixed-Interest Securities

question 16

Essay

Steve Howell is seeking to select between 2 fixed-interest securities where all income and capital will be returned at maturity that he has assessed as having the same amount of risk exposure for a 3-year term. He has $10,000 available for immediate investment. Ignore the effects of taxation in any calculations.
The details for each security are as follows:
Security A:
Issuer: Wakpac Bank
Annual nominal compound interest rate: Year 1: 4%, Year 2: 6%, Year 3: 8%
Security B:
Issuer: Fortune Finance
Annual real interest rate: 2.75% compounded for 3 years
It expected that inflation for each of the next 3 years will be as follows:
Year 1: 2.5%, Year 2: 3%, Year 3: 5%,
Perform relevant calculations and make an informed investment recommendation to Steve including an assessment of the annualised real rate of return provided by the Wakpac Bank.

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Definitions:

Solicited Proposals

Proposals that are requested by an organization or individual, often through a formal process.

Internal Proposal

A document or presentation aimed at persuading internal stakeholders or management to approve a project, budget, or initiative.

Management Support

The backing and assistance provided by management to help in the implementation of strategies, projects, or initiatives.

Request Funds

The act of formally asking for financial resources or support, typically for a project, cause, or organization.