1. Suppose Rock Prodigal Jones graduates from TAMU and gets a job. Suppose that he has $1,200 in disposable income that he can use to make house and car payments after all other living expenses and this is the way it will be until retirement. Rock decides to buy a new car and he will make a $400/month car payment (assume that this will be his car payment until he retires). He and his wife decide to borrow $120,000 to buy a house. The bank will lend them the $120,000 for 40 years at 6% annual interest rate using a fully amortized loan. Rock will pay back the loan with monthly payments. Rock will invest his monthly disposable income ($1,200 – car payment – house payment) in a mutual fund that promises to pay 8% annually. (Assume that Rock will put this amount in the mutual fund until he retires)
Calculate how much money Rock has to pay monthly on his house loan.
a. $660
b. $719
c. $664
d. $250
(ii) How much money can Rock put in the mutual fund monthly after paying the car and house payment?
a. $540
b. $81
c. $140
d. $600
How much will Rock have in his mutual fund at the end of 40 years when Rock plans to retire? Assume the car payment of $400/month is for 40 years.
a. $1,885,144
b. $282,772
c. $2,094,605
d. $487,833
Suppose that after retirement in 40 years, Rock plans to live another 20 years. Rock will use the money he has in the mutual fund to buy a monthly annuity. That is he will give an investor the money in his mutual fund and in turn the investor will promise to pay Rock a fixed monthly amount of principal and interest. How much money will he have to live on each month assuming that the interest rate for the annuity is 5% annually? (hint: Remember that the annuity is monthly so you need to use a monthly rate)
a. $12,441
b. $3,219
c. $1,886
d. $13,823