Question: The parents of three children aged 1, 5, and 7 wish to set up a trust fund that will pay 50,000 to each child upon attainment of age 20, and 100,000 to each child upon attainment of age 25.
If the trust fund will earn nominal annual discount rate of 12% compounded quarterly, what amount must the parents now invest in the trust fund?
Assume that the trust fund will grow at effective annual compound discount rate of 3 % for the first four years, nominal annual compound discount rate of 4 % convertible monthly for the next five years, nominal annual compound interest rate of 5.25% compounded quarterly for the next six years and effective annual compound interest rate of 5.75 % thereafter. What amount must the parents now invest in the trust fund in order to pay 50,000 to the child aged 5 upon attainment of age 20, and 100,000 to the child aged 5 upon attainment of age 25.