Your younger brother is very concerned about investment performance, but he is willing to tolerate some risk. He decides to invest $100,000 in a mutual fund that will earn 10% per year. The proceeds will be accumulated as a lump sum and paid out at the end of year 10. Based on the data given below under Note. what is today’s purchasing power equivalent of your younger brother’s investment? Note: Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3% per year.

Your younger brother is very concerned about investment performance, but he is willing to tolerate some risk. He decides to invest $100,000 in a mutual fund that will earn 10% per year. The proceeds will be accumulated as a lump sum and paid out at the end of year 10. Based on the data given below under Note. what is today’s purchasing power equivalent of your younger brother’s investment? Note: Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3% per year.

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter15: Mutual And Exchange Traded Funds

Section: Chapter Questions

Problem 1FPC

See similar textbooks

Related questions

Q: Mr. White is planning his retirement. He has decided that he needs to withdraw 600,000 per year from…

A: Here the annual withdrawals are in the form of annuity where the periodic amount (P) is 600,000;…

Q: Kathleen has two investment opportunities. She can invest in The Sunglasses Company or the Umbrella…

A: Let's approach this step by step:1. First, let's calculate the expected return of the portfolio:o If…

Q: Assume you are currently 25 years old and just received an inheritance of $1,000,000 from a wealthy…

A: Money have time value that means more money would be required in the future for same amount and this…

Q: Suppose Alex would like to use $8,000 of his savings to make a financial investment. One way of…

A: For the purpose of making investments, alternatives that can be used are: Purchase of shares of…

Q: Jocelyn is indifferent between investing all her wealth (which is $5 million) in the risky asset and…

A: Hello. Since your question has multiple sub-parts, we will solve the first three sub-parts for you.…

Q: You have started an investment club with your friend. You identified an account which you think…

A: Future value is the estimation of current assets' value which are likely to be receive in future…

Q: effective annual interest rate is 6.65% and is nominal. a. Suppose the couple invests money on her…

A: The time value of money recognizes the idea that the value of an amount of money today differs from…

Q: Assume that your parents wanted to have $130,000 saved for college by your 18th birthday and they…

A: The FV of an investment refers to the combined value of the investment's cash flows at a future date…

Q: like to earn a good rate of return but needs to access his money exactly in two years. He prefers…

A: There are many types of investments available in the market and depending on the type of investment…

Q: w baby. You want your child to E withdraw the equivalent of O in today's dollars per year for the 5…

A: in this problem you have to first calculate the present value of education and that will be future…

Q: You are thinking about investing $4,865 in your friend's landscaping business. Even though you know…

A: Present value of future cash flow at comparative risk rate = Future cash flow / (1+expected rate of…

Question

Note: Your older brother is concerned more about investment safety than about investment performance. For example, he has invested $100,000 in safe 10-year corporate AAA bonds yielding an average of 6% per year, payable each year. His effective income tax rate is 33%, and inflation will average 3% per year.

Definition Definition Value of one unit of currency in terms of goods and services. Purchasing power refers to the ability of money to purchase goods and services at a particular point of time. As price levels in the economy increase, the purchasing power of one unit of currency decreases and vice versa.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps with 5 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

I want to solve this please
Allen Young has always been proud of his personal investment strategies and has done very well over the past several years. He invests primarily in the stock market. Over the past several months, how ever, Allen has become very concerned about the stock market as a good investment. In some cases it would have been better for Allen to have his money in a bank than in the market. During the next year, Allen must decide whether to invest $ 10,000 in the stock market or in a certificate of deposit (CD) at an interest rate of 9%. If the market is good, Allen believes that he could get a 14% return on his money. With a fair market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all - in other words, the return would be 0%. Allen estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probability of a bad market is 0.2, and he wishes to maximize his long - run average return. (a) Develop a decision…
Your aunt has $30,000 in a saving account that pays 0.5% annual interest, and her son has told her that she could make more if she invests into the financial markets. She knows that you are a savvy financial analyst and comes to you for help. Moreover, she tells you that she does not want to invest in individual stocks but in well-diversified portfolios. Since you wanted to make sure that you propose an asset allocation that better fits her risk aversion, you asked her to complete the investor profile questionnaire and found out that a "moderate allocation" would work well for her. You proudly tell her that the easy way to hold well-diversified portfolios is through mutual funds and exchange-traded funds (ETFs). You proposed that she opens a trading account and to use mutual funds and ETFs to match her target asset allocation. However, she wants to know more about these securities before investing and asks you: what are the advantages and disadvantages of mutual funds versus…
Suppose you are 28 and married. You and your spouse file for income taxes jointly. You are in the 25% tax bracket. You are considering a few personal investment issues. Suppose you believe that the security market is at efficient in the semi-strong form. You are considering buying some mutual fund shares in your investment accounts. Which of the following statements is correct? a. Actively managed funds are good choices because they may consistently beat the market, they are tax efficient and have lower expenses. b. Actively managed funds are not good choices because they cannot consistentlybeat the market although they are tax efficient and have lower expenses. c. Index funds are not good choices because they are not tax efficient, their management fees are higher although actively managed funds cannot consistently beat the market. d. Index funds are good choices because they are tax efficient and have lower expenses and because actively managed funds cannot consistently beat the…
Michey Lawson is considering investing some money that he inherited. The following payoff table gives the profits that would be realized during the next year for each of the three investment alternatives Mickey is considering: STATE OF NATURE DECISION ALTERNATIVE GOOD ECONOMY POOR ECONOMY Stock market 75,000 -20,000 Bonds 55,000 30,000 CDs 45,000 20,000 Probability 0.3 0.7 Show complete work in your answers to parts a-e: a) What kind of decision-making environment is this?
Jean invests $1000 in Year 1 in a socially responsible fund, and doubles the amount each year after that (so the investment is $1000, 2000, …). (a) If she does this for 10 years, and the investment pays 4% annual interest, what is the future worth of her investment? (b) What are socially/ethically responsible investment funds? How do they differ from other types of investments? Why do people invest in them?
Assume that your uncle gave you $50,000 to invest solely in mutual funds. Based on your point in the life cycle and your investment philosophy, identify your investment goals and explain how you would spread your money among different funds. Include the funds you would invest in, the amounts you would invest and explain why you selected these funds.
Mustafa Kurtulmuş has always been proud of his personal investment strategies and has done very well over the past severalyears. He invests primarily in the stock market. Over the past several months, however, Mustafa has become very concerned aboutthe stock market as a good investment. In some cases, it would have been better for Mustafa to have his money in a bank than in themarket. During the next year, Mustafa must decide whether to invest 10,000 TRY in the stock market or in a certificate of deposit (CD)at an interest rate of 9%*. If the market is good, Mustafa believes that he could get a 14% return on his stock market investment. Witha fair market, he expects to get an 8% return. If the market is bad, he will most likely get no return at all - in other words, the returnwould be 0%. Mustafa estimates that the probability of a good market is 0.4, the probability of a fair market is 0.4, and the probabilityof a bad market is 0.2, and he wishes to maximize his long-run average…
7). Kevin is 25 years old and just finished taking a Personal Finance class. He wants to start a investment plan with a goal of reaching $1,000,000 by the time he is 55 years old. He decides to invest in a Real Estate Investment Mutual Fund that has paid a dividend yield of 12% for the past several years. If Kevin wanted to make ONE investment at age 25 and let it grow, how much would he need today to reach that goal? If Kevin decides that he wants to invest in the Real Estate Investment Fund in equal monthly payments every year, how much will he have to invest on a monthly basis?
Annie Williams is considering a retirement portfolio and wonders if she should move some of her money into an international investment. She has been working for a short time period (she graduated University just four years ago, she has put her retirement savings into a mutual fund whose strategy mimicked the return of the S&P 500 stock index/ large company stock), this fund has historically earned a return averaging 12% over the last 80 years, but recently the returns were somewhat depressing, as the economy is going through a mild recession because of this Annie is considering an international mutual fund that diversifies its holdings around the industrialized economies of the world and average 14% annual rate of return. The international funds higher average return is offset by the fact that the standard deviation in its return is 30% compared to only 20% for the domestic index fund. Reviewing more closely, she learned that the domestic and international fund tend to earn high…
Assume the role of a financial advisor. You have 3 new clients. Each of them came to you with $100,000 to invest. You suggest to each other them to put the money into mutual funds. What mutual funds do you suggest for each client and why. Support your recommendations. Jose - 29 Years of Age. Working. Makes $250,000 a year. Married. No kids. No immediate need for cash. Investing Risk Tolerance = High. Cynthia - 49. Single. 3 kids. Working. Makes a modest annual income. Ages 13, 15, 17. All kids plan to attend college. Plans to use some of this money to help pay for college tuition. Investing Risk Tolerance = Moderate. Jackie - 80. Retired. Receives a modest retirement income. Needs money to help pay monthly expenses. She is healthy. She also has three older siblings in their 90's. Investing Risk Tolerance Low.
Juan is a small-business owner. He has some cash flow and wants to invest in a new project. Juan's assistant provides an evaluation and estimates the nominal returns that Juan would earn if he invests in the project. Juan reads the evaluation and makes the decision based on the real terms after factoring in inflation. Good Financial Decision? Yes No Joe is an average investor. His financial advisor gave him options of investing in a company's stock A, with a o of 12%, and stock B, with a o of 9%. Both stocks have the same expected return of 16%. Joe can pick only one stock and decides to invest in stock A. Good Financial Decision? Yes No