Unit 4 Individual Assignment

Name your file “Lastname, Firstname Unit 4”.

For this unit, the assignment focuses on working with the formulas that are used to measure risk and return.

PROBLEM #1

Twin sisters, Joanna and Liz, received today $44,000 each from their parents for their 24th birthday. They will use this money to start their retirement plans.

They both hope to retire with $1.5 million dollars. Each plans to make a $1,000 monthly contribution to her retirement fund, beginning one month from today.

Joanna opened an account with the Conservative Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 4.7% per year in the past.

Liz invested in the Aggressive Growth Fund, which invests in small, bio-tech stocks and whose investors have earned an average of 7.9% per year in the fund’s short history.

a) If the two women’s funds earn the same returns in the future as in the past, how old will each be when she reaches her retirement goal? Round your answer to the nearest whole year.

b) How much would Liz’s retirement fund grow to, if she invests for the exact same time as Joanna needs to reach her initial goal?

c) How large would Joanna’s monthly contributions have to be for her to reach her retirement goal at the exact same time as Liz needs to reach her initial goal?

d) Is it rational or irrational for Joanna to invest in the bond fund rather than in stocks?

PROBLEM #2

Simon recently received a credit card with an 18% nominal annual interest rate. With the card, he purchased a new Apple iPhone 14 for $900. The minimum payment on the card is $35 per month.

a) If Simon makes only the minimum monthly payment and makes no other charges, how many months will it be before he pays off half the balance on the card? Round your answer to the nearest whole month.

b) If Simon adds just $5 more to his minimum monthly payment, how much less would he owe at that time? Round your answer to the nearest whole month.

c) Simon’s wants to finish paying off in just two years. He found an internet offer from a company willing to pay off his credit card balance, if he pays them $40 per month for 24 months. Is this a good deal for Simon? Why?

PROBLEM #3

Assume that the real risk-free rate is 1.5%, and that the credit risk, liquidity risk and maturity risk premiums are all zero. A 1-year U.S. Treasury bill yield is 4.66% and a 2-year Treasury note yields 4.31%.

a).What is the 1-year interest rate that is expected for Year 2? Do not round intermediate calculations. Round your final answer to two decimal places.

b) Inflation is currently 4%. Based on the above Treasury yields, what does the market expect inflation to be next year?