Question: a. The portfolio manager of a tax-exempt fund is considering investing $500,000 in a debt instrument that pays an annual interest rate of 5.7% for four years. At the end of four years, the portfolio manager plans to reinvest the proceeds for three more years and expects that for the three-year period, an annual interest rate of 7.2% can be earned. What is the future value of this investment?
b. Suppose that the portfolio manager in part a has the opportunity to invest the $500,000 for seven years in a debt obligation that promises to pay an annual interest rate of 6.1% compounded semiannually. Is this investment alternative more attractive than the one in part a?