Problem Set 1
Instructions: 1) Open book, open notes limited to only class materials. 2) Unlimited time. 3) This must be reflective of your individual effort. GMU Honor Code applies. 4) The Problem Set #1 (only the question solutions portion) is due at the end of the day on September 24th. 5) Show all work, as partial credit will be given for each question’s answer. Organize your work so it is easy to follow. You can use word, power point, excel or combinations of the above. 6) Return the Solutions pages to be graded. Put a copy in the course folder and send me an electronic copy that I will grade and return to you along with the approved solution. 7) The exercise is worth 100 points. 8) GOOD LUCK
1) You are savings for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $21,000 per year per child, payable at the end of each school year. The annual interest rate is 15%. Your deposits begin one year from today. You will make your last deposit when your oldest child enters college. (15 points)
How much money must you deposit in an account to fund your children’s education?
2) My spouse and I are each 62 and hope to retire in three years. After retirement we will collectively receive $7,500 per month after taxes from pension plans and $1500 after taxes from Social Security. Unfortunately our monthly living expenses are $15,000. Our social obligations preclude further economics.
We have $1,000,000 invested in high grade, tax free municipal bond mutual fund. The return of the fund is 3.5% per year. We plan to make annual withdrawals from the mutual fund to cover the difference between our pension and SSA income and living expenses. (15 points)