EBK FINANCIAL MARKETS AND INSTITUTIONS
EBK FINANCIAL MARKETS AND INSTITUTIONS
7th Edition
ISBN: 9781260166101
Author: SAUNDERS
Publisher: YUZU
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Chapter 18, Problem 11P
Summary Introduction

To determine: Terminal value of 401(k) plan for 3 options.

Expert Solution & Answer
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Explanation of Solution

Note: Assume all the contributions and returns are remains constant over 20 years.

Option: 1

Terminal value=(Contribution and return×%Equity×(1+r)n1r)+(Contribution and return×%Bonds×(1+r)n1r)=16,500 (0.6){[(1+ 0.12)201]0.12} + 16,500(0.4){[(1+0.05)2010.05]} = $931,554

Option: 2

Terminal value=(Contribution and return×%Equity×(1+r)n1r)+(Contribution and return×%Bonds×(1+r)n1r)+(Contribution×%Money market securities×(1+r)n1r)=16,500 (0.5){[(1+ 0.12)201]0.12} + 16,500(0.45){[(1+0.05)2010.05]} +16,500(0.05){[(1+0.03)2010.03]} =$862,115

Option: 3

Terminal value=(Contribution and return×%Equity×(1+r)n1r)+(Contribution and return×%Bonds×(1+r)n1r)+(Contribution×%Money market securities×(1+r)n1r)=16,500 (0.4){[(1+ 0.12)201]0.12} + 16,500(0.5){[(1+0.05)2010.05]} +16,500(0.1){[(1+0.03)2010.03]} =$792,676

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