HW #1 (answers)

HW #1 (answers) - 1(20 Points G iven the state of the...

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1. (20 Points) Given the state of the economy, you decide that it is time to save for your looming unemployment. You have $10,000 to put into an FDIC insured CD at your local bank. If the CD offers an APR of 2%, how much will you have accumulated in 1 year? FV = 10,000(1.02) = 10,200 How much will you have in 5 years? FV = 10,000(1.02)^5 = 11,040.81 Instead of investing in the CD your buddy, who runs a venture capital firm, tells you his fund can earn you 20% a year. How much will you have accumulated in 1 year at your buddy’s VC firm? FV = 10,000(1.20) = 12,000 How much will you have in 5 years? FV = 10,000(1.20)^5 = 24,883.20 What if the CD offered monthly compounding? Would it be worth more than the venture capital investment in 1 year? FV = 10,000(1 + (.02/12))^1*12 = 10,201.84 Why wouldn’t you always invest in the fund offering 20% returns? Can’t you earn more money than you would in the CD? Discuss. While your buddy may promise you 20%, a venture capital fund is going to be a much riskier investment than an FDIC insured CD at your bank.
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In expectation, you may earn a larger return with the VC fund, but you will put your capital (your $10,000) at considerable risk to do so…think of what happened to risky assets during the 4 th quarter of 2008. If you needed this money in the near future, you would not risk your capital in the VC fund.
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2. (20 Points) Your buddy Earl is 23 years old. Earl’s goal has always been to have $1,000,000 in his trust fund by the age of 30. However, he is concerned that last year’s bear market has really hurt his chances. If Earl currently has $400,000 in his trust fund and expects to earn 7% a year until the age of 30, will he reach his goal? 1,000,000 = 400,000 (1+.07)^t we need to solve for t T = 13.54 , he won’t make his goal What age will Earl be when he makes $1,000,000? Around 36.5 What if Earl were able to earn 12% APR? 1,000,000 = 400,000 (1+.12)^t we need to solve for t T = 8.08 , he still won’t make his goal What rate would Earl have to earn each year to make his goal? 1,000,000 = 400,000 (1+ r)^7 we need to solve for r r = 14% What if Earl also added $10,000 per year (at the end of each year) and the account yields 7% APR? Will he reach his goal? 1,000,000 = [400,000 (1+.07)^t]
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HW #1 (answers) - 1(20 Points G iven the state of the...

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