Business Finance Answers_Part_34

Business Finance Answers_Part_34 - CHAPTER 7 B-133 35. To...

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CHAPTER 7 B-133 35. To answer this question, we need to find the monthly interest rate, which is the APR divided by 12. We also must be careful to use the real interest rate. The Fisher equation uses the effective annual rate, so, the real effective annual interest rates, and the monthly interest rates for each account are: Stock account: (1 + R ) = (1 + r )(1 + h ) 1 + .11 = (1 + r )(1 + .04) r = .0673 or 6.73% APR = m [(1 + EAR) 1/ m – 1] APR = 12[(1 + .0673) 1/12 – 1] APR = .0653 or 6.53% Monthly rate = APR / 12 Monthly rate = .0653 / 12 Monthly rate = .0054 or 0.54% Bond account: (1 + R ) = (1 + r )(1 + h ) 1 + .07 = (1 + r )(1 + .04) r = .0288 or 2.88% APR = m [(1 + EAR) 1/ m – 1] APR = 12[(1 + .0288) 1/12 – 1] APR = .0285 or 2.85% Monthly rate = APR / 12 Monthly rate = .0285 / 12 Monthly rate = .0024 or 0.24% Now we can find the future value of the retirement account in real terms. The future value of each account will be: Stock account: FVA = C {(1 + r ) t – 1] / r } FVA = $900{[(1 + .0054) 360 – 1] / .0054]} FVA = $1,001,704.05
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This document was uploaded on 10/31/2011 for the course FIN 3403 at University of Florida.

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Business Finance Answers_Part_34 - CHAPTER 7 B-133 35. To...

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