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Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th
birthday, and he just made a 6th payment into the fund. The grandfather(or his
trustee) will make 40 more $2,500 payments until a 46th and final payment is made on
Steve''s 65th birthday. The grandfather set things up this way because he wants Steve to
work, not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his
old age.
Until now, the grandfather has been disappointed with Ed, hence has not given him anything.
However, they recently reconciled, and the grandfather decided to make an equivalent
provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed
his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and
final payment will be made. If both trusts earn an annual return of 8%, how much must the
grandfather put into Ed''s trust today and each subsequent year to enable him to have the
same retirement nest egg as Steve after the last payment is made on their 65th birthday?
2. John and Daphne are saving for their daughter Ellen''s college education. Ellen just turned 10
at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and
expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate
of 3.5% a year. Ellen should graduate in 4 years--if she takes longer or wants to go to
graduate school, she will be on her own. Tuition and other costs will be due at the beginning
of each school year (at t = 8, 9, 10, and 11).
So far, John and Daphne have accumulated $15,000 in their college savings account(at t =
0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t
= 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following
years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the
annual payments at t = 5, 6, and 7 be to cover Ellen''s anticipated college costs?

3. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold
at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original
Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its
semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same
effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard
flotation costs, and round your final answer up to a whole number of bonds.



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