Your firend, Piere Maceau, is facing a dificult decision. Having just inherited 75,000, he is contemplating the following two investment alternatives:...

Your firend, Piere Maceau, is facing a dificult decision. Having just inherited €75,000, he is contemplating the following two investment alternatives: his bank adviser in Paris recommended the opening of a savings account that would earn an annual interest rate of 4.15 percent (compounded annually, “CA”). If Pierre does not withdraw the money for the two years, the interest rate would increase by 10 basis points to 4.25 percent for any year thereafter without withdrawal. Alternatively, he could deposit his money in a savings account the abank advertizes as SIM account for “Simple is more”,. According to the bank’s terms, deposits earn simple interest of 4.8 percent per year (the interest is not reinvested) for a minimum of five years without withdrawals. Pierre has a stable income and is not planning on spending the money in the near future. At the same time, he is very risk averse, which is the reason he is interested in opening a saving account as opposed to higher yielding but more risky investment. Answer the following questions:

Assuming an investment period of five years, would you recommend the SIM account?

Does your answer change as the investment period doubles to ten years?

Determine the number of years the money would have to remine investef or Pierre to be indifferent between the two account types.

If Pierre can reinvest the simple interest from the SIM account in risk-free sovereign bonds, yielding 2.25 percent per year, which account type becomes more beneficial over a ten-year period?