User Account

All Pages

FIR 3410, Finance Basics

Assignment Help:
Your client, a man, is currently 35 years old and he wants to retire when he is 65 years old (exactly 30 years from now). He would like his retirement income to be equivalent to $6,000 per month, adjusted for inflation. You estimate that inflation rate for the next 30 years to average 3% annually. He anticipates purchasing a guaranteed retirement annuity form an insurance company the month before he retires (359 months from now). The insurance company will use the actuarial life expectancy table below to determine the cost of the annuity. As you can see, he is expected to live about 16 years (s, he should expect to purchase a 193 month annuity) following retirement. They will add a 4% premium to the pure premium calculated from their actuarial table. He has a $25,000 in savings today that will be invested until he retires. Given a rate of return of 6% (annually but compounded monthly) for the foreseeable furture for both your client and the insurance company, how much does he need to save each month (359 months) for the next 29 years and 11 months (first payment to be made in one month) if he is to aford to purchase the annuity contract? (assume that you make the last month payment in 29 years and 11 months, the month before you receive your first monthly retirement payment.)

Period LIfe Table, 2011
Male Female
Death Probability Number of Lives Life expectancy Death probability Number of Lives LIfes expect
60 0.012405 84,642 19.81 .007732 90,821 23.11
61 0.013589 83,592 19.05 .008497 90,119 22.28
62 0.014840 82,456 18.31 .009318 89,353 21.47
63 0.016149 81,232 17.57 .010192 88,521 20.67
64 0.017547 79,920 16.85 .011138 87,618 19.88
65 0.019102 78,518 16.15 .012199 86,642 19.09
66 0.020847 77,018 15.45 .013384 85,642 18.32

1) What dollar amount will be needed per month at retirement age? (Hint: you want the equivalent to 6,000 per month when you retire; however, inflation will be 3% over the next 30 years! So you want to calculate the FV in 30 years.)

2) Okay, in part 1 you calculated the monthly dollar amount needed for retirement. Now you need to determine what the PV of this stream of retirement income will be (one month before retirement). Hint: THis will be the PVA of the stream of monthly retirement income - fromt part 1 - for 193 months. Remember this PV is in the future when you are ready to retire.)

3) What will hte price of this annuity? (Hint: This next step is easy - you need to determine what this annuity will cost. The figure you arrived at in part 2 is the pure premium. Now you need to increase this by the amount the insurance company adds to the pure premium.)

4) What is the future value of your client''s savings in 359 months when he plans to retire? (Hint: Your client has savings - what will these be worth in the future?)

5) What is the new total amount needed by month 359 when he plans to retire? (Hint: This is easy to calculate - - it is the amount from 3 minus the figure determined in 4.)

6) How much needs to be saved monthly so you will have sufficient savings to purchase this annuity from the insurance company? (Hint: You need to solve for the annuity amount. You know the FVA, the interest rate, number of periods.)

Finance

Related Discussions:- FIR 3410

Financial markets, what are financial markets. why do they exist

what are financial markets. why do they exist

Profitability index or p.i., Profitability Index or P.I. P.I. (benefit...

Profitability Index or P.I. P.I. (benefit-cost ratio) = Present value of inflows / Present value of cash outlay Whether P.I. is greater than 1.0, invest and whereas less th

How can you analysis organization position, The organization performed very...

The organization performed very well during the last year and generated profit in each segment. In the food and beverage segment, the company has made 30% net profit and in rooms a

Cash budgeting, what is cash budgeting and what is it used for

what is cash budgeting and what is it used for

Factors affecting share prices, Factors Affecting Share Prices The ent...

Factors Affecting Share Prices The entire sorts of influences affect share prices. These influences involves as: 1. The current profit record of the company particularly th

What is expected return, 1. Using the variance-covariance matrix (∑) and th...

1. Using the variance-covariance matrix (∑) and the expected return vector (er) given in the appendix, calculate the set of weights that correspond to the portfolio that maximizes

Risk premium of a stock, (a) RBC has 100 loans outstanding, each for $1 mil...

(a) RBC has 100 loans outstanding, each for $1 million, which it expects to be repaid today.  Each loan has a 5% probability of default, in which case the bank is not repaid anythi

Determine the classification of new issue market, Classification of New Iss...

Classification of New Issue Market New market can be classified as: (i) A market where firms go to public for the first time through initial public offering (IPO). (ii

Calculate the profit and segment of the organization, Food and Beverages ...

Food and Beverages Rooms, Restaurants and Other Services Other Income Total $ $ $ Sale

Origination fees, jack needs to borrow $1000 for the next year. Bank south ...

jack needs to borrow $1000 for the next year. Bank south will give him the loan at 9%. Suncoast will give him the loan at 7% with a $50 loan orgination fee. First national will giv

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd