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income used to pay college tuition and expenses. a. If the interest rate is 11 percent, how much money will your friends need to put into their savings account today to have $155,000 in 18 years? b. What if the interest rate were 8 percent? c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 4 percent per year, and that today's interest rate is 12 percent, what will your friend's investment need to be? d. Return to part (a), the case

income used to pay college tuition and expenses. a. If the interest rate is 11 percent, how much money will your friends need to put into their savings account today to have $155,000 in 18 years? b. What if the interest rate were 8 percent? c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 4 percent per year, and that today's interest rate is 12 percent, what will your friend's investment need to be? d. Return to part (a), the case

Essentials Of Investments
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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Some friends of yours have just had a child. Thinking ahead, and realizing the power of compound interest, they are considering investing for their child's college education, which will begin in 18 years. Assume that the cost of a college education today is $155,000. Also assume there is no inflation and no tax on interest income used to pay college tuition and expenses. a. If the interest rate is 11 percent, how much money will your friends need to put into their savings account today to have $155,000 in 18 years? b. What if the interest rate were 8 percent? c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 4 percent per year, and that today's interest rate is 12 percent, what will your friend's investment need to be? d. Return to part (a), the case with a 11 percent interest rate and no inflation. Assume that your friends don't have enough financial resources to make the entire investment at the beginning. Instead, they think they will be able to split their investment into two equal parts, one invested immediately and the second invested in 7 years. Describe how you would compute the required size of the two equal investments, made seven years apart.
Transcribed Image Text:Some friends of yours have just had a child. Thinking ahead, and realizing the power of compound interest, they are considering investing for their child's college education, which will begin in 18 years. Assume that the cost of a college education today is $155,000. Also assume there is no inflation and no tax on interest income used to pay college tuition and expenses. a. If the interest rate is 11 percent, how much money will your friends need to put into their savings account today to have $155,000 in 18 years? b. What if the interest rate were 8 percent? c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 4 percent per year, and that today's interest rate is 12 percent, what will your friend's investment need to be? d. Return to part (a), the case with a 11 percent interest rate and no inflation. Assume that your friends don't have enough financial resources to make the entire investment at the beginning. Instead, they think they will be able to split their investment into two equal parts, one invested immediately and the second invested in 7 years. Describe how you would compute the required size of the two equal investments, made seven years apart.
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