Investment options - bond yields, Finance Basics

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John has just inherited $50,000 from his Uncle Ted. John is currently studying his Bachelor of Accounting degree at CQUniversity part-time and has three (3) years of study remaining. John decides to invest his inheritance for the next three (3) years and seeks your help in choosing the best investment option available. John has provided the following details about four possible options.

Option 1:  Purchase 50 three-year Government Bonds. Each bond has a face value of $1,000 and pays half-yearly coupons of $32. The bonds are selling at par. Assume the coupons are reinvested at the same rate as the bond yields.

Option 2:  Place the $50,000 in a three-year cash management account with a company. A company are currently offering investors 6.3% p.a. compounding monthly.

Option 3:  Place the $50,000 in a three-year term deposit with a company. A company are currently offering term deposits a return of 6.4% p.a. compounding quarterly.

Option 4:  Purchase a three-year zero-coupon corporate bond for $50,000. The bond is expected to yield 6.5% p.a.

Required:

(a) Calculate the value of each option at the end of the three-year investment period.

(b) Which option should you recommend to John as the best investment opportunity? Why?


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