Problem set 3 solutions

Problem set 3 solutions - F301 Page 1 of 6 Fall 2010 F301...

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Unformatted text preview: F301 Page 1 of 6 Fall 2010 F301 - Financial Management 2010 Fall Problem Set 3 Solutions Assignments should be handed in on a separate sheet of paper. If you have multiple sheets, please staple your assignment together. Please show your work in a well-organized, businesslike fashion. It should be neither crowded nor illegibly tiny. Questions should be in numerical order and professionally presented. Make this assignment look like something you could submit to your boss. Full credit will only be given when you show your work. Show formulas and equations or calculator inputs (TVM keys). Each question is worth three points. Total possible points = 42. 1. To prepare for her retirement, an investor plans to make a deposit at the end of each month into a retirement fund. She plans to retire 35 years from now, so she will make 420 deposits. After she retires, she wants to withdraw $48,000 from this fund at the end of each year for the next 20 years. If the fund will earn a rate of return of 6.3% per year (EAR) both before and after retirement, how much must she deposit each month up until retirement in order to meet her objective? That is, what is the amount of the monthly deposit, to fund the annual withdrawals? This is a retirement problem, so you can solve it by constructing two timelines. First step, though, is to get the rate right. You are given an EAR (rate per year). But the deposits will be monthly. So you’ll need a rate per month. ¡ ¢ £¤¥¦§¨©ª«¬ ­® ¯ ¡ ¢ £¤°§§±°ªª«¬ ­ ¯ ¡²³´µ ¡ ¢ £¤¥¦§¨©ª« ¯ ¡²³´µ ­ ­® ¯ ¡²³³¶¡ · ¯ ³²¶¡¸¤¹º£¤¥¦§¨© Second step is to find how much is needed as of the retirement date in order to fund all the withdrawals. The deposits must grow to that value by the retirement date. So that’s the FV of the deposits. Use the monthly rate to find the amount of each deposit (PMT). N I PV PMT FV 20 6.3000% cpt 48,000 use EAR $537,394.91 F301 Page 2 of 6 Fall 2010 2. I loaned my brother-in-law $2,000 for six months. I’m charging him interest at the rate of 1% per month. I have agreed, however, to permit him to make just two payments, one at the end of each quarter. What will be the amount of his quarterly payment? Payments are quarterly, so you need to use the rate per quarter....
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This note was uploaded on 01/13/2011 for the course BUS A202 taught by Professor Tindall during the Spring '10 term at IUPUI.

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Problem set 3 solutions - F301 Page 1 of 6 Fall 2010 F301...

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