[Solution]Calculations

You must upload an Excel spreadsheet for your assignment, with formulas showing all calculations. If you wish, you may submit, in addition, a Word document or PDF with accompanying text.…

You must upload an Excel spreadsheet for your assignment, with formulas showing all calculations. If you wish, you may submit, in addition, a Word document or PDF with accompanying text.
 
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, just received $55,000 each from their parents for their 25th 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 $10,000 annual contribution to her retirement fund on all her future birthdays, beginning one year from today.
 
Joanna opened an account with the Conservative Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 5.2% 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 9.1% 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 large would Joanna’s annual contributions have to be for her to reach her retirement goal at the same age as Liz?
 
c) 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 an Apple iPhone 12 for $755. The minimum payment on the card is $25 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 the card? Round your answer to the nearest whole month.
b) If instead, Simon adds just one additional dollar to his monthly payment, how many months quicker will he pay off the debt? 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 $50 per month for 18 months. Is this a good deal for Simon? Why?
 
 
PROBLEM #3
 
Assume that the real risk-free rate is 0.5%, and that the credit risk, liquidity risk and maturity risk premiums are all zero. A 1-year U.S. Treasury bill yield is 1.10% and a 2-year Treasury note yields 1.43%.
 
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) What annual inflation rate is expected during Year 2? Do not round intermediate calculations. Round your final answer to two decimal places.
 
 
 

If you are missing …
Rate
Number of Time Periods
Periodic Payment
Present Value
Future Value
Note 1:
Note 2:
 

 
… use Formula
=RATE(Periods, Payment, Present Value, Future Value, [Type])
=NPER(Rate, Payment, Present Value, Future Value, [Type])
=PMT(Rate, Periods, Present Value, Future Value, [Type])
=PV(Rate, Periods, Payment, Future Value, [Type])
=FV(Rate, Periods, Payment, Present Value, [Type])
If there are no periodic payments, “Payment” has a value of 0, or can be left blank.
However, if there are periodic payments, but no starting amount, “Present Value” has a value of 0, but CANNOT be left blank.
For most financial products, payments are paid/received at the end of the period (“payment in arrears”). In that case, the “Type” for all of the above formulae has a value of 0, or can be left blank.
If the periodic payments are paid/received at the start of the period (“payments in advance”), then Type must be set to “1”.
 

Sheet1

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