Timothy is retiring from his job soon at which time his employer will make the following offer: A lump sum amount of $200,000 A sum of $15,000 at the beginning of each year for the next 25 years. If the average interest rate is likely to be 5.5% p.a. for the next 25 years, which option should Timothy choose?

Timothy is retiring from his job soon at which time his employer will make the following offer: A lump sum amount of $200,000 A sum of $15,000 at the beginning of each year for the next 25 years. If the average interest rate is likely to be 5.5% p.a. for the next 25 years, which option should Timothy choose?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A couple will retire in 30 years: they plan to spend about $30,000 a year (in real value) in retirement, which should last about 20 years. They believe that they can earn 6% nominal return on retirement portfolio account. The inflation rate over the next 50 years is expected to average 2%. a) What is the nominal value of the retirement fund the couple must have by the time they retire in 30 years to make it possible? b) How much do they need to save in nominal terms each year to create the retirement fund in part a)? c) If the couple successfully achieve their goal, what will be their nominal expenditures in the last year of retirement (year 50)?
Timothy is retiring from his job soon at which time his employer will make the following offer: 1. A lumpsum amount of $200,0002. A sum of $15,000 at the beginning of each year for the next 25 years. If the average interest rate is likely to be 5.5% p.a. for the next 25 years, which option should Timothy choose?
Tom was trying to determine the best way to save for his retirement. He was selecting between two plans and reasoned that they would provide him the same yield at the end of the terms. Plan A: Deposit $250 per month at 8% annual interest, compounded monthly, for 20 years. Plan B: Deposit $500 per month at 8% annual interest, compounded monthly, for 10 years. Is Tom correct? If not, which plan would provide him the larger annuity? Select the correct answer below: Yes, Tom is correct. Since he is doubling his monthly payment, he can cut the investment time by half. The same amount is deposited either way. No. Plan A will provide a larger savings since there is more time for compound interest to take effect. No. Plan B will provide a larger savings since he is depositing more each month, there is a larger principal for interest to be compounded upon. There is not enough information to determine the answer.
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4,880 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,220 plus an additional investment at the end of the second year of $6,100. What is the NPV of this opportunity if the interest rate is 1.8% per year? Should Marian take it? (yes or no)
Bill plans to buy a new house soon he’s considering two mortgage options. 15 year mortgage with a APR 2.75% or a 30 year mortgage with an APR of 3.14%. Both options are compound interest monthly. Bill currently spends $1,685 each month on rent he will like to spend the same on a mortgage. He doesn’t have a down payment and will finance the full price for the home. Round answer to whole numbers a. If Bill choose the 15 year mortgage how much doesn’t he need to borrow b. If Bill choose the 30 year mortgage how much doesn’t he need to borrow c. Which option will allow Bill go borrow the most. By how much d. Which option will Bill spend the most overall. By how much
A couple takes a second mortgage of $100,000 and promises to pay it back with accured interest 15 years from now. They are given the interest option of simple interest at 4.5% per annum. Is this a good option? Give the answer supported by calculations.
Paul and Paula are purchasing a home for a price of $500,000. To avoid paying mortgage insurance, they will make a down payment of 20% of the price or $100,000. They will finance the remaining $400,000 with a 30-year, monthly payment, amortized mortgage at a fixed 7.2% nominal interest rate, with the first payment due in one month. What will the size of their monthly payment be?
Donna enters into an investment contract that will guarantee her 4% per year if she deposits $3,500 each year for the next 10 years. She must make the first deposit one year from today, the day she signs the agreement. How much will she have when she makes her last payment 10 years from now?
In this question, consider that you are 60 years old and considering retirement. An insurance company offers to sell you the following Annuity in exchange for a portion of your IRA: • The Annuity commits to paying you 2,000 per month for the next 20 years, with the first payment to be made beginning one month from today. • Your price of the Annuity is $250,000 paid by you today from your IRA. The insurance company is rated AAA, but the investment is not FDIC insured like bank deposits. What is the expected annual rate of return on this investment? What is the Yield-on this investment? That is what is the annual expected rate of return? From an investment point of view, do you consider this a good investment today? Discuss why, or why not.
Alicia's investment manager offers her an interest rate of 8.0% compounded monthly on her investments. If the manager changes his mind and offers her a rate of 8.0% compounded annually how much more would she have to deposit at the end of each year in order to accumulate $445,000 in 20 years? Round to the nearest cent

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