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Invest in the bond fund rather than in stocks

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Reference no: EM13517012

Erika and Kitty who are twins just received $30,000 each for their 25th birthday. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to their "retirement fund", on her birthday, beginning a year from today. Erika opened an account with Safety first bond fund, a mutual fund that invest in high quality bonds, whose investors have earned 6% per year in the past. Kitty invested in the new issue BIO-tech fund, which invest in small, newly issued bio-tech stocks and whose investors have earned an average 20% per year in the fund's relatively short history.

a. If the two women's funds earn the same returns in the future as in the past, how old will each be when they become millionaires?

b. How large will Erika's annual contributions have to be for her to become a millionaire at the same age as Kitty, assuming their expected returns are realized?

c. Is it rational or irrational for Erika to invest in the bond fund rather than in stocks and why?

Reference no: EM13517012

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