1)

Scot has promised that 3 years from now (2022), he will start to pay out to Sussie to take a trip under the following year end schedule:

Year 1-3 (2022-2024):$10,000 per year (ordinary annuity)

Year 4 (2025):$15,000

Year 5 (2026):$18,000

Sussie has $4,000 saved up as of 12/31/2019.Her trip is expected to cost $75,000 at the end of 2026.

Will she have enough money saved up to go?Both Sussie and Scot expect to earn 5% per year on their money.

I = 5% Tables:

I = 5% FVF PVF FVA PVA

N = 1 1.050 0.952 1.000 0.952

N = 2 1.103 0.907 2.050 1.859

N = 3 1.158 0.864 3.153 2.723

N = 4 1.216 0.823 4.310 3.546

N = 5 1.276 0.784 5.526 4.329

N = 6 1.340 0.746 6.802 5.076

N = 7 1.407 0.711 8.142 5.786

2)

Bond investor buys Caterpillar bonds paying a 4% coupon, but the investor is then earning a 3% yield to maturity.Explain how this is possible; give a numerical example to help with explanation.

3)

When an investor earns an effective annual return which is greater than the stated annual rate on their investment, what is causing that (what is the term used to describe this process)?