Scott has just inherited $60,000 from his Uncle Russell. Scott is currently studying his Bachelor of Accounting degree at CQUniversity and has two (2) years of study remaining. Scott decides to invest his inheritance for the next two years and seeks your help in choosing the best investment option available. Scott has provided the following details about four possible options.
Option 1: Place the $60,000 in a two-year cash management account with Westpac. Westpac is currently offering investors 6.24% p.a. compounding monthly.
Option 2: Place the $60,000 in a two-year term deposit with Commonwealth Bank; which is currently offering term deposits a return of 6.3% p.a. compounding quarterly.
Option 3: Purchase a two-year zero-coupon bond for $60,000. The bond is expected to yield 6.4% p.a.
Option 4: Purchase a two-year Government Bond for $60,000. The bond pays half-yearly coupons and receives the face value at maturity. The coupon rate is 6.5% p.a. compounding half-yearly and the bond's yield to maturity is currently 6.0476% p.a. Assume the coupons are reinvested at the same rate as the bond yields. The face value of the bond is $59,500.
Required:
(a) Calculate the value of each option at the end of the two-year investment period.
(b) Which option should you recommend to Scott as the best investment opportunity? Why? Write one paragraph to justify your recommendation.