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
Related questions
Question
Liam O'Kelly is 20 years old and is thinking about buying a term life insurance policy with his wife as the beneficiary. The quoted annual premium for Liam is $8.51 per thousand dollars of insurance coverage. Because Liam wants a $80,000 policy (which is 2.5 times his annualsalary), the annual premium would be $681, with the first payment due immediately (i.e., at age 21). A friend of Liam's suggests that the $681 annual premium should be deposited in a good mutual fund rather than in the insurance policy. "If the mutual fund earns 9% per year, you can become a millionaire by the time you retire at age 65," the friend advises.
Is the friend's statement really true?
The future value of annual premiums deposited in a good mutual fund is?
Transcribed Image Text:Compound
Amount
Factor
Present
Worth Factor
Discrete Compounding;/=9%
Single Payment
Compound
Amount
Uniform Series
Sinking
Factor
Present
Worth Factor
Fund
Factor
To Find F
To Find P
To Find F
To Find P
Given P
Given F
Given A
Given A
Given F
To Find A
Capital
Recovery
Factor
To Find A
Given P
N
F/P
P/F
F/A
P/A
A/F
A/P
1
1.0900
0.9174
1.0000
0.9174
1.0000
1.0900
2
1.1881
0.8417
2.0900
1.7591
0.4785
0.5685
3
1.2950
0.7722
3.2781
2.5313
0.3051
0.3951
4
1.4116
0.7084
4.5731
3.2397
0.2187
0.3087
5
1.5386
0.6499
5.9847
3.8897
0.1671
0.2571
6
1.6771
0.5963
7.5233
4.4859
0.1329
0.2229
7
1.8280
0.5470
9.2004
5.0330
0.1087
0.1987
8
1.9926
0.5019
11.0285
5.5348
0.0907
0.1807
9
2.1719
0.4604
13.0210
5.9952
0.0768
0.1668
10
2.3674
0.4224
15.1929
6.4177
0.0658
0.1558
11
2.5804
0.3875
17.5603
6.8052
0.0569
0.1469
12
2.8127
0.3555
20.1407
7.1607
0.0497
0.1397
13
3.0658
0.3262
22.9534
7.4869
0.0436
0.1336
14
3.3417
0.2992
26.0192
7.7862
0.0384
0.1284
15
3.6425
0.2745
29.3609
8.0607
0.0341
0.1241
16
3.9703
0.2519
33.0034
8.3126
0.0303
0.1203
17
4.3276
0.2311
36.9737
8.5436
0.0270
0.1170
18
4.7171
0.2120
41.3013
8.7556
0.0242
0.1142
19
5.1417
0.1945
46.0185
8.9501
0.0217
0.1117
20
21
23
25
30
40
45
50
22222222248
5.6044
0.1784
51.1601
9.1285
0.0195
0.1095
6.1088
0.1637
56.7645
9.2922
0.0176
0.1076
6.6586
0.1502
62.8733
9.4424
0.0159
0.1059
7.2579
0.1378
69.5319
9.5802
0.0144
0.1044
7.9111
0.1264
76.7898
9.7066
0.0130
0.1030
8.6231
0.1160
84.7009
9.8226
0.0118
0.1018
13.2677
0.0754
136.3075
10.2737
0.0073
0.0973
35
20.4140
0.0490
215.7108
10.5668
0.0046
0.0946
31.4094
0.0318
337.8824
10.7574
0.0030
0.0930
48.3273
0.0207
525.8587
10.8812
0.0019
0.0919
74.3575
0.0134
815.0836
10.9617
0.0012
0.0912
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