11. Don may not be the brightest candle on the cake. He has more taxes withheld from his paycheck so he will get a large check come April from the Federal government. (So in other words - he's actually lent the government money at zero % interest - what a guy! ) Well, this check came in the mail yesterday. $2,200.00 and he deposited it into a savings account paying 4% interest. Assuming he leaves it there for four years, how much money will he eventually have?
12. Bill plans to fund his individual retirement account (IRA) with a contribution of $2,000 at the end of each of the next 15 years. If he can earn 12% on his contributions, how much will he have at the end of the twentieth year?
Hint: yes, I said how much at the end of the twentieth year - that's not a typo (BTW, "twentieth" does not = 12!. Yes, we've seen that.). Draw this out in a time line. What you will find is that this is really two problems in one - you will need two formulas to solve it.
13. I have some good news and some bad news. The bad news is: no member of you family has ever lived past age 60. The good news is: think of how much social security money you family has saved the rest of us! Anyway you just "celebrated" your 40th birthday (complete with all those lovely black balloons that read, "Over The Hill"). Since you are certian the grim reaper will visit you in 20 years, you decide to purchase an investment that will pay you $4,000 each year until you"reach room temperature" - that is - age 60. If this investment returns 6% to you, how much should you be willing to pay for it? ("pay for it", as in TODAY!)
14. You hate paying interest, but someday you want to buy a home. Easy - pay cash! After debating how much you should pay for this house, you decide a quarter of a million dollars has a nice ring to it. Assuming your bond fund will pay 7% and you have 12 years to save, how much will you have to save each year?
Hint: here's one of those problems where you will not be solving for $ on the left side of the equation.
15. You are given a gold coin originally purchased by your great-great grandfather 50 years ago. He paid $1.00 for it at the time. Checking with Coins-R-Us you find the coin is now worth $450. If you sell it now, what will be the rate of return?
Hint: now this obviously isn't an annuity problem, so you are down to two possible equations. This is another one where drawing a time line really helps you to visualize what's going on.
16. Once upon a time, your mother told you to "pay yourself first" - and you always listened to your mother (except for the time you and two of your friends went to Atlantic City in the middle of the night ... well never mind THAT!). Twice each year (6 months apart) you place $300 in your savings account at your local credit union. The credit union pays 4% annual interest compounded semi-annually. How much will your savings grow to in eight years?
Hint: this is a semi-annual problem. Check out page OM-8 - bottom of page.
17. How long will it take a sum to double at 9% interest (I need to see the appropriate PV/FV formula - if you know the "rule of 72s" that's great - just don't use it here!)