Assignment: The Life of Earl

"Question 1. The day Earl was born; his Dad bought a winning scratch-off lottery ticket. After taxes, he received $5345. Being a wise man, Earl's dad realized that with all the financial demands of raising a child, that he most likely would not be able to deposit money regularly into a savings account for his son's future. So he decided to take his winnings and buy a 20 year CD for his son. Locking the money into a CD would allow Earl's dad to get a higher interest rate than a regular savings account. The CD will earn 6.5% compounded per annum. In 20 years, how much money will Earl receive from the CD?"

"Question 2. On Earl's 5th birthday his dad received a big raise at his current job. He thought maybe he could now afford to deposit $50 a month into an account to help pay for Earl's education. He just happened to have $50 cash in his pocket, so he went down that day and made his first payment into a 13 year annuity that earned 6.3% per annum. When Earl turns 18, how big will his college fund be?"

"Question 3. Earl just turned 15 and passed the test to receive his learning permit to drive, but Earl needs a truck. He has an uncle that works at the local car dealership and he has been talking to him about getting a good deal on his purchase. Earl has a steady job and believes that if he works hard, he will be able cover the monthly payments and buy a new vehicle. The truck that Earl wants to purchase has a sales price of $28,165. His uncle has offered him two different purchasing options. The first option is $2000 off the sale price and 6.9% annual interest on a 72 month loan. The second option is $0 cash back and 0% financing for 72 months. Earl's uncle estimates that the cost of tax, title and license will be an additional $650. Which deal will give Earl the lowest monthly payment - Calculate the monthly payment for both deals."

"Question 4. Now that Earl has figured out how to purchase his first vehicle, he needs to figure out how he is going to pay for his auto insurance. Remember, Earl is just 15, so he still has a year before he can purchase his new truck. Earl talks to his family insurance agent and determines that his full-coverage insurance will cost him about $1950 a year and he can either pay it all at once, or pay a one-time yearly finance charge of $35, which will allow him to split the premium up into 12 equal monthly payments of $165.42. Earl is getting the hang of this finance thing and has a little bit of money that he has saved up over the last few years. He determines that if he plans ahead, and deposits money now in a savings account, that instead of paying the insurance company the $35 to finance his car insurance for a year, he can earn interest from the bank now, and then have enough money to pay the insurance all at once. This should save him money. So Earl heads to the bank to make a deal.

The bank will pay 3.9% per annum on a savings account. Earl asks for weekly compounding because he knows that more frequent compounding results in higher earnings.

(4a) How much money will Earl need to deposit now to have $1950 one year from now?

(4b) How much money did Earl save by using the savings account and paying all at once rather than paying the finance charge to the insurance company and paying monthly?"

"Question 5. Over the next few years, Earl gets his car, studies and works hard in high school, and is getting ready to graduate and begin his college career. He knows that the next four years will be just as hard, working to get his truck paid off, living away from home, and keeping good grades in college. Earl decides that as a reward for all his efforts, when he graduates from college, he will go on a trip to Jamaica for a relaxing week of fun in the sun.

At the end of each day, Earl throws all his pocket change into an old whisky bottle. He also has a buddy that is a DJ and occasionally asks Earl to come help him with the larger events. His friend pays him cash, so he just adds it to the whisky bottle along with any other money he makes on various odd and end jobs. At the end of the summer Earl took his bottle of money to the bank and made a deposit. He believes if he continues doing this he can save enough money to finance his trip to Jamaica. Last summer Earl deposited $200, he thinks he will be able to deposit at least $250 at the end of this coming summer and an additional $350 each year after that. If he continues doing this through college as planned and earns 5.6% compounded per annum: how much Jamaica money will he have at the end of the 5 year period?"

"Question 6. Earl graduates from college, returns from Jamaica, and goes to work for his uncle at the local car dealership. Earl is a very business oriented and out-going person and quickly begins making bookoos of money selling cars and trucks. He knows he should be investing a portion of his income, so he decides to set up an appointment with a financial planner and get a mutual fund going. Earl likes finance and wants to take an active part in his investment, so he tells his planner that he wants to pick the companies that are to be included in his investment portfolio. With guidance from his financial planner, Earl begins the task of setting up his portfolio. He realizes that he needs to stay diversified and not put all of his eggs in one basket, so he decides that in addition to stocks; he wants to also include a few bonds in the portfolio.

Earl finds two different bonds that he decides to include in his portfolio:

Bond 1 is priced at $878, has a coupon rate of 8%, interest paid annually and 9 years to maturity. What is the yield to maturity of this bond?

Bond 2 has 15 years to maturity and pays quarterly interest at an annual coupon rate of 10.5%. The market rate of this bond is currently 15%. How much will Earl have to pay to purchase this bond?

In addition to the two bonds, Earl wants to invest in stock from 2 different companies. He also knows that he should select his stock from two different industries in an attempt to have the lowest possible correlation; so Earl decides to buy some stock from the auto company in which he works, and the other from a company that would not be correlated with the auto industry. Since automobile sales move up and down with the economy, maybe Earl should consider investing in a company that will generate more sales when the economy is in a recession period. This would need to be something that people buy no matter what the economy was doing, like toilet paper, or maybe a discount retailer that people would turn to when their money is tight. Earl decides to invest in Ford Motor Company and Family Dollar Stores, Inc.

The Ford Motor Company stock is currently selling for $14.51 and will be paying dividends of $.60 per share. The dividend 4 years ago was $.20. What is the yield of the Ford stock?

Family Dollar stock is currently selling for $70 and paid $1.24 per share dividends this past year. Dividends three years ago were $.79. What is the current yield for this stock?"

Question 7. Earls wants to provide for his dad's retirement and his future children; so he figures out a way to kill two birds with one stone. He sets up a perpetuity at 8.5% that will pay his dad $75,000 a year for the rest of his life. Then, when his dad dies, his children will inherit the perpetuity. The children will have the option of either cashing it in and splitting the money, or letting it continue throughout their lifetime. If Earl's children decide to cash in the perpetuity, how much money will they have to divide among themselves?

"Question 8. Lastly, when Earl comes to the end of his life, he does not want to place any burden on his family, so he decides to set up one more account that will pay for his funeral expenses. He hopes to live a long and active life, so the first thing he needs to figure out is how much money he will need to set back. If a basic funeral cost $8000 today and the inflation rate averages 1.75% per annum, how much will a basic funeral cost 60 years from today?

How much will Earl need to deposit semi-annually in an account paying 4.5% annual interest, to be able to pay for a funeral in 60 years?"

"BONUS QUESTION. If you are considering a long-term investment that earns a rate of 8.5% APR, how long will it take for your investment to quadruple? (Yes this problem has all info necessary to calculate the problem.)

Attachment:- Assignment File.rar