Question

1.You are offered a contract with a signing bonus. If they offered you either $215,000 in cash or $2,000 a month for 15 years, guaranteed, which do you take (based strictly on the math)? Your safe rate of return is 7.5%.

2.You are 30 years old today and planning to retire at age 62. You want to plan your finances for living 35 years past age 62 and die dead broke. You determine you will need $3000 per month from age 62 for the 35 years.3. Your plan is to go live in the tropics, on the beach, and live on coconuts and fishing. Also, you need to conclude your retirement savings at age 55 because all your spare money then will be going to your children’s education. How much money you will need to save each month between now and 55 so that you can quit contributing? The expected return on your investments over the whole period is 10% per year.  

4. What should a zero coupon bond maturing for $1000 in 9 years with a 7% market rate sell for?

Answer 1

1

PVOrdinary Annuity = C*[(1-(1+i/(f*100))^(-n*f))/(i/(f*100))]

C = Cash flow per period

i = interest rate

n = number of payments I f = frequency of payment

PV= 2000*((1-(1+ 7.5/1200)^(-15*12))/(7.5/1200))

PV = 215746.85

Using Calculator: press buttons "2ND"+"FV" then assign

PMT =2000

I/Y =7.5/12

N =15*12

FV = 0

CPT PV

Using Excel

=PV(rate,nper,pmt,FV,type)

=PV(7.5/(12*100),12*15,,PV,)

Choose monthly payment as PV is more than immediate payment