Question

# Your grandfather left an inheritance for you of \$100,000. However you can only drawdown on the...

Your grandfather left an inheritance for you of \$100,000. However you can only drawdown on the investment as follows:

Years 1 – 3          \$15,000 each year

Year 4 to 6          \$10,000 each year

Year 7                    \$25,000

Interest on the fund is 5%.

a) What is the present worth of this inheritance?

b) Due to high liquidity interest rate have dropped to 4%. What will be the impact on the present worth of this inheritance as a consequence of the market change?

. Consider Donald and Joe who are both 30- years of age and recently graduated with a degree in Finance. Both Donald and Joe plan to retire at age 67, and the retirement plan pays a 12 percent per annum return and is also compounded monthly. Donald plans to invest \$1,000 per month beginning next month into his retirement account, while Joe shall invest \$2,000 per month. Joe however does not plan to begin investing until 10 years after Donald begins to invest. How much will each of the newly grads have at retirement?

As the Fund Manager for Bank of Trinidad and Tobago Limited, you are to advise the following two (2) clients based on their respective financial situations. (Graded Manually)

a) Your best friend has asked to assist him in making the best investment out of the following options. Which would you advise him to choose and why? Show your workings to justify your response.

Option 1: \$12,000 in 5 years’ time at 6 percent interest.

Option 2: \$15,000 in 2 years’ time at 9 percent interest.

Option 3: \$15,000 today. No strings attached.

Option4: \$5,000 each year for 2 years at 7 percent interest compounded semi-annually.

A) Present worth of this heritance -

Present worth = discounted value of future cash inflow (discounted @ 5%)

= 81550 ( as per calculation given below)

 Year Drawdown PFV @ 5% Present Value 1 15000 0.95 14250 2 15000 0.9 13500 3 15000 0.86 12900 4 10000 0.82 8200 5 10000 0.78 7800 6 10000 0.74 7400 7 25000 0.7 17500 81550

B ) Impact on present worth due to interest rate change

 Year Drawdown PFV @ 4% Present Value 1 15000 0.96 14400 2 15000 0.92 13800 3 15000 0.96 14400 4 10000 0.92 9200 5 10000 0.96 9600 6 10000 0.92 9200 7 25000 0.96 24000 94600

As a consequence of market rate change (i.e interest rate change from 5% to 4%) the present net work of inheritance will increase by 13050 ( 94600-81550).

Note - It has been assumed that the drawdowns shall be made at the year end.

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