Case Study: Time value of money Mr. Road has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested carefully. Mr. Road owns his home (the mortgage is paid off) and does not want to move. He is a widower, he wants to bequeath the house and any remaining assets to his daughter. He has accumulated savings of $180,000, conservatively invested. The investments are yielding 9% interest. Mr. Road also has $12,000 in a savings account at 5% interest. He wants to keep the savings account intact for unexpected expenses or emergencies. Mr. Road's basic living expenses now average about $1,500 per month, and he plans to spend additional $500 per month on travel and hobbies. To maintain this planned standard of living, he will have to rely on his investment portfolio. The interest from the portfolio is $16,200 per year (9% of $180,000), or $1,350 per month. Mr. Road will also receive $750 per month in social security payments for the rest of his life. These payments are indexed for inflation. That is, they will be automatically increased in proportion to changes in the consumer price index. Mr. Road's main concern is with inflation. The inflation rate has been below 3% recently, but a 3% rate is unusually low by historical standards. His social security payments will increase with inflation, but the interest on his investment portfolio will not. Suppose Mr. Road will live for 20 more years and is willing to use up all of his investment portfolio over that period. He also wants his monthly spending to increase along with inflation over that period. In other words, he wants his monthly spending to stay the same in real terms. How much can he afford to spend per month? What advice do you have for Mr. Road? Assume that the investment portfolio continues to yield a 9% rate of return and that the inflation rate is 4%. Things to note: 1. Sources of his income. 2. Distinguish money between nominal term and real term. 3. Mr. Road wants to keep his savings account of $12,000 intact, but he can use the interest from this account. 4. Think how inflation will affect his savings account? Can he use all the interest from his savings account? 5 Relation between inflation and retirement planning
Case Study: Time value of money Mr. Road has reached his seventieth birthday and is ready to retire. Mr. Road has no formal training in finance but has saved his money and invested carefully. Mr. Road owns his home (the mortgage is paid off) and does not want to move. He is a widower, he wants to bequeath the house and any remaining assets to his daughter. He has accumulated savings of $180,000, conservatively invested. The investments are yielding 9% interest. Mr. Road also has $12,000 in a savings account at 5% interest. He wants to keep the savings account intact for unexpected expenses or emergencies. Mr. Road's basic living expenses now average about $1,500 per month, and he plans to spend additional $500 per month on travel and hobbies. To maintain this planned standard of living, he will have to rely on his investment portfolio. The interest from the portfolio is $16,200 per year (9% of $180,000), or $1,350 per month. Mr. Road will also receive $750 per month in social security payments for the rest of his life. These payments are indexed for inflation. That is, they will be automatically increased in proportion to changes in the consumer price index. Mr. Road's main concern is with inflation. The inflation rate has been below 3% recently, but a 3% rate is unusually low by historical standards. His social security payments will increase with inflation, but the interest on his investment portfolio will not. Suppose Mr. Road will live for 20 more years and is willing to use up all of his investment portfolio over that period. He also wants his monthly spending to increase along with inflation over that period. In other words, he wants his monthly spending to stay the same in real terms. How much can he afford to spend per month? What advice do you have for Mr. Road? Assume that the investment portfolio continues to yield a 9% rate of return and that the inflation rate is 4%. Things to note: 1. Sources of his income. 2. Distinguish money between nominal term and real term. 3. Mr. Road wants to keep his savings account of $12,000 intact, but he can use the interest from this account. 4. Think how inflation will affect his savings account? Can he use all the interest from his savings account? 5 Relation between inflation and retirement planning
Chapter13: Investment Fundamentals
Section: Chapter Questions
Problem 2FPC
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Transcribed Image Text:Case Study: Time value of money
Mr. Road has reached his seventieth birthday and is ready to retire. Mr.
Road has no formal training in finance but has saved his money and invested
carefully.
Mr. Road owns his home (the mortgage is paid off) and does not want to
move. He is a widower, he wants to bequeath the house and any remaining
assets to his daughter.
He has accumulated savings of $180,000, conservatively invested. The
investments are yielding 9% interest. Mr. Road also has $12,000 in a savings
account at 5% interest. He wants to keep the savings account intact for
unexpected expenses or emergencies.
Mr. Road's basic living expenses now average about $1,500 per month, and
he plans to spend additional $500 per month on travel and hobbies. To
maintain this planned standard of living, he will have to rely on his
investment portfolio. The interest from the portfolio is $16,200 per year (9%
of $180,000), or $1,350 per month.
Mr. Road will also receive $750 per month in social security payments for
the rest of his life. These payments are indexed for inflation. That is, they
will be automatically increased in proportion to changes in the consumer
price index.
Mr. Road's main concern is with inflation. The inflation rate has been below
3% recently, but a 3% rate is unusually low by historical standards. His
social security payments will increase with inflation, but the interest on his
investment portfolio will not.
Suppose Mr. Road will live for 20 more years and is willing to use up all of
his investment portfolio over that period. He also wants his monthly
spending to increase along with inflation over that period. In other words, he
wants his monthly spending to stay the same in real terms. How much can he
afford to spend per month? What advice do you have for Mr. Road?
Assume that the investment portfolio continues to yield a 9% rate of return
and that the inflation rate is 4%.
Things to note:
1. Sources of his income.
2. Distinguish money between nominal term and real term.
3. Mr. Road wants to keep his savings account of $12,000 intact, but he can
use the interest from this account.
4. Think how inflation will affect his savings account? Can he use all the
interest from his savings account?
5. Relation between inflation and retirement planning.
Transcribed Image Text:Case Study: Time value of money
Mr. Road has reached his seventieth birthday and is ready to retire. Mr.
Road has no formal training in finance but has saved his money and invested
carefully.
Mr. Road owns his home (the mortgage is paid off) and does not want to
move. He is a widower, he wants to bequeath the house and any remaining
assets to his daughter.
He has accumulated savings of $180,000, conservatively invested. The
investments are yielding 9% interest. Mr. Road also has $12,000 in a savings
account at 5% interest. He wants to keep the savings account intact for
unexpected expenses or emergencies.
Mr. Road's basic living expenses now average about $1,500 per month, and
he plans to spend additional $500 per month on travel and hobbies. To
maintain this planned standard of living, he will have to rely on his
investment portfolio. The interest from the portfolio is $16,200 per year (9%
of $180,000), or $1,350 per month.
Mr. Road will also receive $750 per month in social security payments for
the rest of his life. These payments are indexed for inflation. That is, they
will be automatically increased in proportion to changes in the consumer
price index.
Mr. Road's main concern is with inflation. The inflation rate has been below
3% recently, but a 3% rate is unusually low by historical standards. His
social security payments will increase with inflation, but the interest on his
investment portfolio will not.
Suppose Mr. Road will live for 20 more years and is willing to use up all of
his investment portfolio over that period. He also wants his monthly
spending to increase along with inflation over that period. In other words, he
wants his monthly spending to stay the same in real terms. How much can he
afford to spend per month? What advice do you have for Mr. Road?
Assume that the investment portfolio continues to yield a 9% rate of return
and that the inflation rate is 4%.
Things to note:
1. Sources of his income.
2. Distinguish money between nominal term and real term.
3. Mr. Road wants to keep his savings account of $12,000 intact, but he can
use the interest from this account.
4. Think how inflation will affect his savings account? Can he use all the
interest from his savings account?
5. Relation between inflation and retirement planning.
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