Problem 1: Mr and Mrs Chew are both 60 now and hope to retire in 5 years. At age 65, they will each receive approximately $1,500 per month from CPF LIFE. As they love to travel and desire to spend extended periods overseas, their joint monthly living expenses in retirement are estimated to be $10,000.
They currently have $1 million in retirement savings invested in a government bonds fund. This is their only source of retirement savings besides CPF savings. The return on the fund is 4% per year. At retirement, they plan to sell their investments and make annual withdrawals from the proceeds to cover the difference between their CPF LIFE payouts and their living expenses. How long can their retirement savings last before they run out of money?
Problem 2: An investor is considering investing in 2 government bonds. Bond A has face value of $1,000, a 8% coupon rate and two years to maturity. Its price is 980. Bond B has face value of $1,000, a 12% coupon rate and two years to maturity. Its price is $1,050.
Compute the 1-year spot rate and the 2-year spot rate.