Some friends of yours have just had a child. Thinking ahead, and realizing the power of compound interest, they are considering investing for their child's college education, which will begin in 18 years. Assume that the cost of a college education today is $150,000; there is no inflation; and there are no taxes on interest income that is used to pay college tuition and expenses.
a.If the interest rate is 5 percent, how much money will your friends need to put into their savings account today to have $150,000 in 18 years?
b.What if the interest rate were 10% percent?
c.The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 3% per year, and that today's interest rate is 8 percent, what will your friend's investment need to be?