Assume that a pension plan offers to pay $500,000 on a person's retirement (his/her sixty-fifth birthday) or a semi-annual annuity for the remainder of the person's life – i.e., starting 6 months from the date of retirement and including his/her date of death. Interest rates are 7 percent compounded annually, and a person's life expectancy has been determined statistically as being 78.5 years. Calculate the amount of the annuity that would make a person indifferent between the options?
Assume that a pension plan offers to pay $500,000 on a person's retirement (his/her sixty-fifth birthday) or a semi-annual annuity for the remainder of the person's life – i.e., starting 6 months from the date of retirement and including his/her date of death. Interest rates are 7 percent compounded annually, and a person's life expectancy has been determined statistically as being 78.5 years. Calculate the amount of the annuity that would make a person indifferent between the options?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 1
(a) Assume that a pension plan offers to pay $500,000 on a person's retirement
(his/her sixty-fifth birthday) or a semi-annual annuity for the remainder of the
person's life – i.e., starting 6 months from the date of retirement and including
his/her date of death. Interest rates are 7 percent compounded annually, and a
person's life expectancy has been determined statistically as being 78.5 years.
Calculate the amount of the annuity that would make a person indifferent between
the options?
Transcribed Image Text:(b) A person joins a pension plan at age 40 (40th birthday). How much will s/he have
to pay into the pension fund each year in order to accumulate a balance of
$500,000 by the time s/he retires (age 65)? Assume that the final payment is on
his/her 60th birthday. Interest rates are 9% compounded semi-annually.
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