After graduating from Ohio State University with a degree in Finance, Kate Myers took a position as a stock broker with Merrill Lynch in Cleveland. Her goal was to set aside funds for the eight years to make a down payment on a house that currently costs $98,000 and in the past, homes appreciated by nearly 4% per annum. Kate wants to make a 20% down payment. Kate will invest funds for the purchase at an annual rate of return of 8%.
Q 1. Taking into consideration the fact that the $98,000 home price will grow at 4% per year, what will be the future median home selling price in Lakewood in eight years? What amount will Kate need as a down payment?
Q 2. Based on your answer from number 1, how much will have to be deposited in an account each month (which earns 8% per year) to accumulate the required down payment?
Q 3. If Kate decides to make end-of-the-year deposits into the account, how much would these deposits be? Why is this amount greater than 12 times the monthly payment amount?
Q 4. If Kate decided to deposit her down payment funds in less risky certificates of deposit (CDs) earning only 4%, how much would she have to deposit at the end of each month to make the down payment?
Q 5. What if she pursued a more risky investment of growth stocks that have an expected return of 12%?