FIN 254

1.

Assume that your father is now 50 years old, that he plans to retire in 10 years, and that he expects to live for 25 years after he retires, that is, until he is 85. He wants a xed re- tirement income that has the same purchasing power at the time he retires as $40,000 has today (he realizes that the real value of his retirement income will decline year by year after he retires). His retirement income will begin the day he retires, 10 years from today, and he will then get 24 additional annual payments. Ination is expected to be 5 percent per year from today forward; he currently has $100,000 saved up; and he expects to earn a return on his savings of 8 percent per year, annual compounding. To the nearest dollar, how much must he save during each of the next 10 years (with deposits being made at the end of each year) to meet his retirement goal? 2. You are serving on a jury. A plaintiff is suing the city for injuries sustained after falling down an uncovered manhole. In the trial, doctors testied that it will be 5 years before the plaintiff is able to return to work. The jury has already decided in favor of the plain- tiff, and has decided to grant the plaintiff an award to cover the following items: (1) Recovery of 2 years of back-pay ($34,000 in 2000, and $36,000 in 2001). Assume that it is December 31, 2001, and that all salary is received at year end. This recov- ery should include the time value of money. (2) The present value of 5 years of future salary (20022006). Assume that the plaintiff s salary would increase at a rate of 3 percent a year. (3) $100,000 for pain and suffering. (4) $20,000 for court costs. Assume an interest rate of 7 percent. What should be the size of the settlement?

3. Assume that your aunt sold her house on December 31, and that she took a mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal) interest rate of 10 percent, but it calls for payments every 6 months, beginning on June 30, and the mortgage is to be amortized over 10 years. Now, one year later, your aunt must file Schedule B of her tax return with the IRS, informing them of the interest that was included in the 2 payments made during the year. (This interest will be income to your aunt and a deduction to the buyer of the house.) To the closest dollar, what is the total amount of interest that was paid during the first year? 4. A 15-year security has a price of $340.4689. The security pays $50 at the end of each of the next 5 years, and then it pays a different fixed cash flow amount at the end of each of the following 10 years. Interest rates are 9 percent. What is the annual cash flow amount between Years 6 and 15