Question

Time Value of Money in Personal Finance

Mr. Haris, 32 years and Mrs Tini aged 30 years has been married for 5

years now. They have two kids, Arif age 4 and Amira, 1 year. The spouse

is planning to send their kids to further their study to a local university

after completing tertiary education at the age of 18. Taking into

consideration the inflation rate, education cost for the next 14 years is

estimated to be amounting RM90,000 which will include the education fee

and living expenses for a 4 years study period. This cost will increase at

the rate of 2 percent a year onwards.

The spouse has taken an insurance policy for both of the kids starting this

year. Premium payment for the policy is RM3,360 yearly for Arif and

RM3,000 yearly for Amira. This policy will give an expected return of 5.0

percent annually and will mature when the kids reach 18.

1. Calculate the value of the insurance policies for both of the children

upon maturity.

2. How much surplus or deficit the value in (1) as compared to the

cost of education for each of the children.

3. How much monthly the family should invest for each children if it is

to be invested in a unit trust fund that will give a 6 percent in return

to cover the amount in (2)?

4. If the family decide to cancel the insurance, how much lump sum

money need to be saved today to achieve the education objective

for each of the children if it to be invested in the same unit trust

fund in (3)?.

5. If the family plan to achieve the education fund in 8 year, how much

rate of return should they look for in the unit trust fund?.

(Draw the time line in all of your solution)

Answer #1

1. The value of insurance policies for both the children upon maturity is as follows:

- Mr. Arif:

Premium = RM 3,360 p.a

Compounded annually with an interest rate of 5% p.a

No. of years left for Mr. Arif to reach the age of 18 is 14 years (Policy gets matured when Arif reaches 18 years (-) Present age of Arif is 4 years). So, ,Policy tenure is 14 years.

Considering the following formula

Maturity Value = P((1+r)^{n-1}/r) (1+r)

Where P - Premium, r - return, n - tenure of policy

P - RM 3,360; r - 5%; n - 14 years

Maturity value = 3,360((1+0.05)^{14-1}/0.05)(1+0.05)

^{=} 3,360((1.05)^{13}/0.05)*(1.05)

^{ =} 3,360(37.71298)(1.05)

= 1,33,051

Maturity value of Mr.Arif policy is RM 1,33,051.

In the same way, Maturity value of Ms. Amira is as follows:

P - RM 3000, r- 5%, n - 17 years

Maturity value = 3000((1+0.05)^{17-1}/0.05)(1+0.05)

= 1,44,397

Maturity value of Ms. Amira policy is RM 1,44,397

Time Value of Money
1. En. Ahmad invested Rm50,000 in a mutual fund 5 years ago. The
fund provided
compounded rate of return of 7% p.a over the last 5 years. What is
the value of En.
Ahmad’s investment now?
2. Johnny has a child whose education plan requires RM500,000 to
finance the
completion of his tertiary education 10 years from today. Johnny
has set aside
RM200,000 for this purpose. He wants to know what investment rate
of return is...

The Marco family—comprising Mrs. Marco aged 40, Mr. Marco, aged
39, and their three young children— relocated to Barcelona in
January 2020 when Mrs. Marco received a job offer from an
international firm. They rented a three-bedroom condominium in
Barcelona for 2.100€ per month, which included parking and
fees.
While renting made life easy, the Marco family began weighing
the pros and cons of purchasing a flat, in the same building, that
became available in June 2020. The idea of...

Your client is 25 years old and wishes to retire at age 65. At
that time, your client wishes to have saved $2,000,000. You advise
the client to set aside money every year for the next 40 years.
This money will be invested in a fund that you believe will average
10% each year for the next 40 years.
Required:
How much will your client need to set aside for each payment
into the fund in order to accumulate the...

The Marco family — comprising Mrs. Marco aged 40, Mr. Marco,
aged 3 9 , and their three young children — relocated to Barcelona
in January 2020 when Mrs. Marco received a job offer from a n
international firm . They rented a three - bedroom condominium in
Barcelona for 2. 1 00€ per month, which included parking and
fees.
While renting made life easy, the Marc o family began weighing
the pros and cons of purchasing a flat, in...

Joseph and Raine Jones want to begin saving yearly for
the college education of their children. They have two children, a
1-year-old and a 5-year-old. They would like to make the first
contribution to the children's college fund a year from today. They
assume the children will begin their college education when they
reach the age of 18. They would like each child to attend an
in-state public university and the current cost of college is
$23,000 each year per...

10. You are 30 years old and planning to retire at age 62. You
want to plan your finances for living 35 years past age 62 and then
die dead broke. You determine that you will need $3000 per month
for the 35 years. At age 62, you plan to go live in the tropics on
the beach and live on coconuts, rum and fishing. You need to
conclude your retirement savings at age 55 because all your spare
money...

You are saving for the college education of your two children.
They are two years apart in age; one will begin college 13 years
from today and the other will begin 15 years from today. You
estimate your children’s college expenses to be $39,000 per year
per child, payable at the beginning of each school year. The annual
interest rate is 7.3 percent. Your deposits begin one year from
today. You will make your last deposit when your oldest child...

Q1-You have decided to start saving money for your future. What
is the future value of a 14-year annuity of $2,200 per year,
assuming that you make your first payment today and the interest
rate is 12 percent? (Enter your answer as a positive number rounded
to 2 decimal places.)
Q2-You need to have $24,856 available at the end of 9 years. How
much to do you have invest each year, starting at the end of this
year, for 9...

You are saving for the college education of your two children.
They are two years apart in age; one will begin college 15 years
from today and the other will begin 17 years from today. You
estimate your children’s college expenses to be $55,000 per year
per child, payable at the beginning of each school year. The annual
interest rate is 9.2 percent. How much money must you deposit in an
account each year to fund your children’s education? Your...

You are saving for the college education of your two children.
They are two years apart in age; one will begin college 13 years
from today and the other will begin 15 years from today. You
estimate your children’s college expenses to be $39,000 per year
per child, payable at the beginning of each school year. The annual
interest rate is 7.3 percent. Your deposits begin one year from
today. You will make your last deposit when your oldest child...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 9 minutes ago

asked 17 minutes ago

asked 32 minutes ago

asked 42 minutes ago

asked 46 minutes ago

asked 47 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago