1 | Rebecca has developed a financial retirement strategy. Her strategy is to invest in somewhat risky stocks for 15 years and then move everything to low risk bonds for the retirement years as described below. | |||||||||||

She presently has $250,000 in a retirement account that will be invested in a stock fund that has historically earned 12% annually (EAR) with no dividends. The plan is to add an additional $25,000 to the fund at the beginning of each of the upcoming 15 years. | ||||||||||||

When she retires, she will reinvest the stock fund in a tax-free municipal bonds and live on the coupons only that have a coupon rate of 2.5% paid semi-annually. (the bonds will be donated to charity upon her death). | ||||||||||||

How much will She receive semi-annually during retirement? | ||||||||||||

2 | Belinda is starting a company with an investment of $500,000. She expects sales to grow arithmetically by $100,000 a year for five years, with sales in year 1 being $100,000, year 2 $200,000, etc.. Then for years 6-10 sales are forecast to grow geometrically at a rate of 30% per year (year 6 sales grow 30% over year 5, year 7 30% over year 6, etc.) | |||||||||||

At the end of each year, for years 1-10, Kay expects profits to be al least 10% of the sales each year and she will invest 10% of profits in a fund that earns 6% APR compounded monthly. | ||||||||||||

a | What will be the value of the invested funds in year 10? | |||||||||||

b | Did the 10 years of profits cover her initial investment? | |||||||||||

3 | Jim won $250,000 in a lottery that he wantsg to invest. He narrowed his search to three funds that each have different stated rates. How much will Jim accumulate in 30 years for each of the three investment alternatives? | |||||||||||

a | 6.15% APR with monthly compounding | |||||||||||

b | 0.50% monthly PIR | |||||||||||

c | 6.25% EAR |

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