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ou will pay into a pension fund until you are aged 65. You are expected to live until your 80th birthday. You are currently 21 years of age. Pension fund contributions are made bi-weekly (use n=2/52) beginning in 2 weeks time. If you are promised an interest rate of 7% compounded monthly, what should be the size of your contribution if you plan to have $1 million at age 65?

ou will pay into a pension fund until you are aged 65. You are expected to live until your 80th birthday. You are currently 21 years of age. Pension fund contributions are made bi-weekly (use n=2/52) beginning in 2 weeks time. If you are promised an interest rate of 7% compounded monthly, what should be the size of your contribution if you plan to have $1 million at age 65?

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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Hello.

I am unsure how to solve this corporate finance problem without using excel.

You will pay into a pension fund until you are aged 65. You are expected to live until
your 80th birthday. You are currently 21 years of age. Pension fund contributions are made
bi-weekly (use n=2/52) beginning in 2 weeks time. If you are promised an interest rate of
7% compounded monthly, what should be the size of your contribution if you plan to have $1 million at age 65?

 

Expert Solution
Step 1: Explain future value of annuity

The future value of annuity is calculated using this formula,

F u t u r e space v a l u e equals P M T cross times open square brackets fraction numerator open parentheses 1 plus r over n close parentheses to the power of t cross times n end exponent minus 1 over denominator open parentheses r over n close parentheses end fraction close square brackets W h e r e comma P M T equals P e r i o d i c space p a y m e n t t equals T i m e space i n space y e a r s n equals N u m b e r space o f space c o m p o u n d i n g space p e r i o d s r equals N o m i n a l space i n t e r e s t space r a t e


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