1. Bob and Lisa are both married, working adults. They both plan for retirement and consider the $2,000 annual contribution a must.
First, consider Lisa's savings. She began working at age 20 and began making an annual contribution of $2,000 at the first of the year beginning with her first year. She makes 13 contributions. She worked until she was 32 and then left full time work to have children and be a stay at home mom. She left her IRA invested and plans to begin drawing from her IRA when she is 65.
Bob started his IRA at age 32. The first 12 years of his working career, he used his discretionary income to buy a home, upgrade the family cars, take vacations, and pursue his golfing hobby. At age 32, he made his first $2,000 contribution to an IRA, and contributed $2,000 every year up until age 65, a total of 33 years / contributions. He plans to retire at age 65 and make withdrawals from his IRA.
Both IRA accounts grow at a 7% annual rate. Do not consider any tax effect.
a) Who made more money?
b) What lesson did you learn from the two investors in relation to time value of money?
2. Renfo rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1000, and a yield to maturity of 8.5%.
a) What is the price of the bonds.
b) What would happen if expected inflation rose by 3%, causing rd = 10%?
c) What would happen if inflation fell, and rd declined to 7%?
d) What does the result tell you about the relationship between interest rate and bond value?
3. Explain how the current US government shutdown affects in terms of bond rating. Previously the US government was down graded from AAA to AA by Standard and Poor.