You have an IRA worth $200,000 and want to start to make equal annual withdrawals (that is, distributions from the account) for 20 years. You anticipate earning 5 percent on the funds. (To facilitate the calculation, assume an annuity due.)

a. How much can you withdraw each year?

b. Since you are earning 5 percent on your investments, how much of the withdrawal consumes your investments?

c. How much will be in the account at the end of the first year?
. How much do you earn on your investments in the account during the second year?

e. How much will be in the account at the end of the second year?

f. Do you see any similarity between this problem and Problem 16?

Problem 16

This extended problem covers many of the features of a mortgage. You purchase a town house for $250,000. Since you are able to make a down payment of 20 percent ($50,000), you are able to obtain a $200,000 mortgage loan for 20 years at a 5 percent annual rate of interest.

a. What are the annual payments that cover the interest and principal repayment?

b. How much of the first payment goes to cover the interest?

c. How much of the loan is paid off during the first year?

d. What is the interest payment during the second year?

e. What is the remaining balance after the second year?

f. Why did the interest payment change during the second year?