MATH 109

EXTRA CREDIT

Name ________________________________________________________________

The purpose of this assignment is to be an Extra Credit Knockout equivalent to the value of a test. So this assignment will be graded like a test but it will be included only if it will knock out a lower grade. The concept of the assignment is to do a financial study of the likely result of various investment strategies leading to a retirement income. You are John's financial planner and you want to show John the effect of various investment strategies. John is 25 years old and is expecting to be in the work force for 40 years and retire at age 65. John is trained in Computer Science and Analytical Chemistry and has obtained an excellent job with DOW Chemical as a Research Chemist.

John's starting salary is $56,549 per year. He is expecting his real salary to double in the context of an expected inflation rate of 3%.

1. Based on that data, calculate John expected salary in 40 years. (You can do that by apply the 3% inflation rate to his current salary and then multiplying it by 2. Use the equation of continuous compounding. S = P e^rt.

Put your answer here ____________________

2. Assume that John salary followed a continuous compounding curve and calculate the equivalent interest rate, i.e. the value of r in the above equation that would yield his final salary in 40 years. (express your answer in annual percentage interest)

Put your answer here ____________________

John's salary schedule based on his projections is, at the beginning of each five year interval:

The financial vehicles that John is considering include Treasury Bonds, Stocks, Annuities and Certificates of Deposit. You will be developing a menu of alternatives for John to illustrate his options. You might want to explore some investment options, and if you do http://www.bygpub.com/finance/finance8.htm might be a reasonable place to get an overview. The first question is how much will John invest and how often?

3. To make the question of John's investment strategy easy let's assume that John invests only once a year, a fixed percentage of his salary. Create a spread sheet and assume four strategies. One strategy is that John invests: Strategy A 2% a year at the beginning of each year, Strategy B is 5% a year, a third, Strategy C is 10% a year and the final strategy D is that John waits ten years and then invests 10% a year. Build a spreadsheet that shows John's annual salary and the amount invested each year based on each of the four strategies and calculate the total amount he will have invested over his forty year career.

Total Money Invested:

A ____________ B ____________ C _____________ D _____________

4. The next question is how will John invest this money. We will limit John to three investment strategies. 1) a tax shelter IRA that is invested 100% in bond funds which yield 5% and 2) a mix of expertly managed mutual funds which have averaged a 9% return, and 3) a 50:50 mix of bonds funds and mutual funds. (This is a vast over simplification of course). He invests his money at the beginning of each year and the interest is cumulative but compounded only once a year.

Calculate the amount John will have for retirement after a 40 year career using each of the 3 investment strategies applied to each of the four savings strategies A through D for a total of twelve combinations of investment and savings strategies.

Create a spreadsheet to calculate John's accumulating retirement fund for each savings strategy and each investment strategy and put the result in the matrix below.

Take your resulting spreadsheet and attach it to an email and send it to me. Turn in this assignment at your earliest convenience.

One last question:

5. Which of these strategies do you thing John should adopt and describe your rationale.

______________________________________________________________________

This assignment will count as an optional test with kickout potential. It cannot hurt your grade and can only help you if it is done well. Think everything through carefully.