Assignment 1 4099 2007 - Individual Hand-in Assignment 1...

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Individual Hand-in Assignment # 1 Individual Hand-in Assignment # 1 Business 4099 WA Winter, 2007 A PPLIED Q UESTIONS – P ERSONAL F INANCIAL P LANNING Question 1 – Time Value of Money Part A – Compounding a Sum Teddy has $35,658 in his RRSP at this moment. The funds are invested in a guaranteed investment that will earn the following rates of return into the future: Time Period Rate of Return First year 7% compounded semi-annually First six months of the second year 6.5% compounded quarterly Second six months of the second year 7.25% compounded monthly Third, fourth and fifth year 8% compounded annually Forecast the accumulated value of Teddy’s RRSP at the end of the fifth year according to these forecasts. Use MS Equation 3.0 to demonstrate the equation you are using and show the substitution of variables and then the derivation of the solution. Part B – Determining a Rate Rachael Paxton hopes to retire in 15 years. She has accumulated $456,798 in her money purchase Registered Pension Plan (RPP). Her financial advisor, after many hours of discussion has determined that she will need $850,000 in her RPP on retirement in order to enjoy the standard of living that she hopes to have in retirement. Assuming she makes no further contributions to her RPP, what rate of return must she earn on the funds in order to achieve her financial goal in 15 years. Comment on the feasibility of this plan. Use MS Equation 3.0 to demonstrate the equation you are using to solve the problem. Business 4099 – Personal Financial Planning Page 1 Instructions: Follow all instructions given in the course outline regarding hand-in assignments. Be sure to follow the additional instructions given in each question. This assignment is due no later than the start of class (7:00 pm) Thursday, February 1, 2007
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Individual Hand-in Assignment # 1 Part C – Determining Time Your client Billy Traynor is anxious about retirement. He is currently 55 years of age and has been trying to get his financial affairs in order. He has a plan to eliminate all of his personal debt in three years time. Additionally, he has $665,000 in his RRSP. As a self-employed business person, he has no RPP. You have been trying to convince Billy that he should be willing to invest his RRSP in more aggressive asset classes, like common stock because the RRSP is a long term investment, and although returns are likely to be volatile over time, the long-term average return on equities is around 10%. Currently Billy has his RRSP invested in money market instruments yielding an average annual rate of return of 4.5%. Using MS Equation 3.0 demonstrate the equation and solution for calculating the time it will take for Billy’s RRSP to grow to $1,000,000. Do this assuming money market returns of 4.5% and equity returns of 10%.
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