Question 1. Person A's portfolio is worth $100,000 today. He expects to retire in 10 years and also expects to earn an 8% return per year on his portfolio until he retires.
Person A's yearly statement from the Social Security Administration projects that he will receive a constant amount of $2000 per month beginning at his retirement in ten years(assume that the $24,000 yearly amount will be paid at the beginning of each year).
Assume that Person A expects to live for 5 years after he retires and that he expects the interest rate to equal 12 % over those five years.
a) What is the expected value (FV) of his portfolio in ten years?
b) What is the expected value (PV) of his social security income in ten years?
c) What is the expected value of his financial wealth in 10 years?
Assume that the monthly SS payment increases each year at the rate of inflation. When person A retires, the expected inflation rate is 5% over the five-year period following his retirement.
d) Given this new information, recalculate your answer in b.
e) Given this new information, recalculate your answer in c.
Question 2. Given the following market interest rates:
1-year Treasury Bills 2.50 percent
1-year Certificate of Deposit 3.00 percent
1-year Commercial Paper 3.25 percent
2-year Treasury Note 2.00 percent
2-year Municipal (AA) Note 2.50 percent
2-year Commercial Paper 3.00 percent
5-year Treasury Note 3.50 percent
20-year Treasury Bond 5.25 percent
20-year Corporate Bond (AA) 8.50 percent
Expected inflation rate for the current year 1.50 percent
a) The slope of the yield curve is?
b) Given a 30 percent tax rate, would an investor prefer a 2-year municipal bond or a 2-year commercial paper?
c) The expected real interest rate on the 1-year Treasury Bill is:
d) What is the default risk premium on the 2-year commercial paper?
e) What is the expected real rate of interest on the 1-year commercial paper?