Problem 1:
A) A Customer asks the lump sum required today to establish a $50,000 retirement annuity beginning at the end of the first year of retirement and continuing for the next 14 years. The retirement annuity is to keep pace with inflation, which is expected to be 4 percent annually (the first payment is $50,000). Your client expects to retire in 20 years. Assume an 8 percent average yield for the total investment horizon (35 years).
B) Assuming a 7 percent yield, calculate the lump sum required on your 50th birthday if you withdrew $20,000 on your 50th birthday and the next 19 birthdays.
Problem 2: European bonds pay coupon interest annually. U.S. bonds pay coupon interest semiannually. All else the same, calculate the equivalent U.S. coupon rate to a European bond that pays 9 percent.