1. Answer this question using Excel. You buy a car for $28,500. The dealer offers financing at 9.5% APR, with $2,500 cash down, and monthly payments for three years. In cell B2 compute the size of the payments. Starting in row 15, construct a full amortization schedule for your loan. Columns should include
column A: Payment Number,
column B: Loan Balance at Start of Month,
column C: Monthly Payment,
column D: Interest Paid this Month,
column E: Principal Repaid this Month, and
column F: Loan Balance at End of Month.
Print out the full spreadsheet on one sheet of paper.
2. You want to fund a Roth IRA each year on January 1. A Roth IRA gives you the right to invest $5,000 in after-tax dollars each year, and you never have to pay taxes afterward on either the amount invested or the investment returns. Let's say you face a choice:
• invest $5,000 on the day you turn 27, and also $5,000 on every birthday through 35 - then never make another investment afterward;
• wait to start investing, then invest $5,000 at on your 36th through 69th birthdays.
In either case, the annual return on investment is 9%. First, determine the total (undiscounted) investment in each case. Calculate the total accumulation from each choice as of your 70th birthday. In a text box nearby, explain why the results came out as they did.
3. Years from now you will want to maintain retirement income that increases by 3% each year to stay ahead of inflation. Assume retirement lasts 30 years (your 60th through 89th birthdays). The initial retirement withdrawal from your account of $160,000 will be made on your 60th birthday. You will make annual savings payments into the account starting on your 28th birthday and ending on your 59th birthday. The amount of these payments will rise by 3% per year. Throughout your life, the invested account balance will earn 10% per year. Calculate the amount of the required payment at age 28 if you are to remain on track for retirement.
4. The Dow-Jones Wilshire 5000 Stock Index (which reflects the broad market) has had returns as shown at right during the past 8 years.
a) Assume you have $8,000 invested in the Index (say, thorough a mutual fund or ETF) at the beginning of 2008. Calculate the value of the investment at year-end 2015.
b) Assume the returns occurred in reverse order (0.67% first, -37.23% last). Re-answer part (a).
c) Re-answer parts (a) and (b), assuming that instead you invest $1,000 at the beginning of each year.
d) Briefly describe your findings and the implications for investors who are saving for retirement.
|
YEAR
|
RETURN
|
YEAR
|
RETURN
|
|
2008
|
-37.23%
|
2012
|
16.06%
|
|
2009
|
28.20%
|
2013
|
33.06%
|
|
2010
|
17.16%
|
2014
|
12.71%
|
|
2011
|
0.98%
|
2015
|
0.67%
|