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CF90_Assignment_1
CF90_Assignment_1
DECLARATION
I hold a copy of this assignment if the original is lost or damaged.
I hereby certify that no part of this assignment or product has been copied from any other student’s work or
from any other source except where due acknowledgement is made in the assignment.
I hereby certify that no part of this assignment or product has been submitted by me in another
(previous or current) assessment, except where appropriately referenced, and with prior permission
from the Lecturer / Tutor / Unit Coordinator for this unit.
No part of the assignment/product has been written/produced for me by any other person except
where collaboration has been authorised by the Lecturer / Tutor /Unit Coordinator concerned.
I am aware that this work will be reproduced and submitted to plagiarism detection software programs for
the purpose of detecting possible plagiarism (which may retain a copy on its database for future
plagiarism checking).
Student’s
signature: Tram Anh
Student’s
signature: Tram Anh
Student’s
signature: Dang Phong
Student’s
signature: Hoang Dung
Student’s
signature: Tuyet Mai
Note: An examiner or lecturer / tutor has the right to not mark this assignment if the above declaration has not
been signed.
ARO 00398 09/15
Group 5 – Class: CF90 (Monday, 8.00 - 11.00)
Name: Mark given Mark given Mark given Mark given Mark given
to Tram Anh to Dang to Tuyet Mai to Tram Anh to Hoang
(Ngo) Phong (Nguyen) Dung
Signature Tram Anh Dang Phong Tuyet Mai Tram Anh Hoang Dung
Take-home Exercise 1
Question 1:
You have just turned 25 years old, had received your master's degree and enjoyed a one-year
break, and have recently accepted your first job. Now you must decide how much money to put
into your retirement plan.
The plan works as follows: Every dollar in the plan earns 8% per year. You cannot make
withdrawals until you retire on your sixty-third birthday. After that point, you can make
withdrawals as you see fit. You decide that you will plan to live to 100 and work until you turn
63. You estimate that to live comfortably in retirement, you will need $100,000 per year, starting
at the end of the first year of retirement and ending on your one-hundredth birthday. You will
contribute the same amount to the plan at the end of every year that you work.
How much do you need to contribute each year to fund your retirement?
Answer:
The amount of money needed made at retirement (63 years old):
● r = 8% = 0.08
● T = 100 - 63 = 37 years
● Annuity = C0 = $100,000
The total worth of the possible withdrawal after the 63rd birthday:
−𝑇 −37
1− (1 + 𝑟) 1− (1 + 0.08)
PV0 = C0 × [ 𝑟
] = $100,000 × [ 0.08
] = $1,177,517.85
⟹The future value from annual contribution is $1,177,517.85
Question 2:
Jenny will invest $1,000,000 in an account.
2.1. What is the future value of her investment in 20 years if the bank offers an annual
percentage rate of 7%:
a. Compounded annually (assuming that the bank's payments are in the form of an annuity
due).
Answer:
FV annuity due = PV x [1 + 𝑟]^t = 1,000,000 x [1 + 0. 07]^20
= $3,869,685
b. Compounded quarterly (assuming that the bank's payments are in the form of an annuity
due).
Answer:
𝑟 𝑚𝑡 𝑟 0.07 20𝑥4
FV = PV x (1+ 𝑛 ) ×(1 + 𝑛
) = 1,000,000 x ( 4
) = $4,076,600
c. Compounded monthly (assuming that the bank's payments are in the form of an ordinary
annuity).
Answer:
FV = PV*(1+0.07/12)^12*20 = $4,038,738.849
d. Compounded continuously (assuming that the bank's payments are in the form of an
ordinary annuity).
Answer
FV = PV*e^(r*T) = 1,000,000*e^(0.07*20) = $4,055,199.967
2.2. Why does the future value increase as the compounding period shortens?
Answer:
- Interest on interest: When interest is compounded more frequently, it's earned not just on
the initial principal amount but also on the accumulated interest from previous periods.
This snowball effect leads to a higher future value.
- More frequent "reinvestment": With more frequent compounding, the earned interest is
"reinvested" sooner, allowing it to generate additional interest in subsequent periods.