1.) You sit on the board of directions of local nonprofit
corporations .At its last meeting, the board decided to begin to
fund a very modest retirement pension for the organization's
custodian. The details of the plan areas as follows:
The custodian is thirty nine years old, the plan will begin
to make annual payments to him twenty six years from
the date when funding for the plan begins. You assume
the custodian will continue his employment with the
When payments begin, the custodian will receive a single
cash payment each year for fifteen years. The first
payment will be $ 5,000 and each succeeding payment
will increase by 4 percent. Payments stop after the
Money paid into the fund collects interest at a constant 8
percent annual rate, and there is no tax liability on the
The annual contributions that the corporations makes to
the fund will also increase 4 percent rate and will also
earn 8 percent interest until withdrawn.
As chair of the personal committee, you are responsible for
determining the initial amount to fund this retirement stipend.
If you If your figures are correct, all succeeding annual budget
amounts will simply be increased 4 percent now to get the plan
2.)An annuity will make a payment of $ 100 in one year, this is
the first of a series of twenty payments. If each succeeding
annual payment is 5 percent larger than the previous one, what
is the percent value of this annuity using a 12 percent discount
3.) What is the future value of the annuity in problem 2.
4.)An investment will pay you $ 200 in one year and then pay
annually,forever. Each payment will be 3 percent larger, then
the previous one. If investment costs $ 2,500 what rate of
return do you expect to earn.
5.) What is the present value of $ 1,000 perpetuity that makes
the first payment five years from today? Assume a 6 percent
6.)A stock just paid its annual dividend of $ 1: it has a dividend
growth rate of 3.5 percent. What is the most you can pay for
the stock to have an expected return of 14.0 percent.?
7.)A person wins $ 1 million in the state lottery. Actually the
person receives $ 50,000 per year every September 1.Using a
10 percent discount rate and the bonds in the table, construct
a cash matched dedicated portfolio that will serve this need.
8.) A$ 100,000 bond portfolio generates exactly $ 9,000 per
year in income. Another $ 100,000 portfolio currently yields
$ 7,000 per year in income, but this amounts expected to grow
at 4 percent annually. In about how many years will the two
portfolios yield equal amounts?
9.)A person is about to retire and must choose between three
retirement plan options. One provides $ 55,000 per year for
the remainder of his life. Another provides 85 percent of this
amount and increases by 5 percent each year. A third option
gives him a $ 400,000 lump-sum settlement If this remaining
life expectancy is twelve years, the prime interest rate is 8
percent and he can ignore taxes, which should he choose?
10.) Would your answer to problem 9 be different if the prime
interest rate were 15 percent and was expected to stay there
for the foreseeable future?
Table bonds list for problems 7
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