Final 1

1. You have just made a $1,500 contribution to your individual retirement account. Assume you earn a 12 percent rate of return and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 10 years before making this contribution?
E. $17,289.75
FV = $1,500 × (1 + .12)25 = $25,500.10 FV = $1,500 × (1 + .12)15 = $8,210.35 Difference = $17,289.75

2. You expect to receive $9,000 at graduation in 2 years. You plan on investing this money at 10 percent until you have $60,000. How many years will it be until this occurs?
C. 21.90 years
$60,000 = $9,000 × (1 + .10)t; t = 19.90 years Total time = 2 + 19.90 = 21.90 years

3. You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and $500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?
D. $3,113.04

4. You want to be a millionaire when you retire in 40 years. You can earn A 12.5 percent annual return. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month?
E. $183.38
FVA40 years = $1,000,000 = C × [{[1 + (0.125/12)]40 × 12; C = $72.53 FVA30 years = $1,000,000 = C × [{[1 + (0.125/12)]30 × 12; C = $255.91 Difference = $255.91 - $72.53 = $183.38

5. Which of the following statements is correct concerning the term structure of interest rates?
I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
III. The real rate of return has minimal, if any, affect on the