1. You are considering a pair of GICs (guaranteed investment contracts) offered by two different life insurance companies. Each promises a single payment 10 years from now.

(a) US Life Insurance Companys GIC promises to pay 6.5% per annum and can be purchased today for $100,000.

(b) Met Lifes GIC promises to pay 5.7% per annum compounded monthly and can be purchased today for $95,000. Which would you buy?

2. The Board of Administrators of Tulane University has decided to offer an early retirement program to University faculty. The typical 55-year old faculty member would receive a small cash severance payment and a pension of $50,000 per year for the next 30 years, to begin one year from now. As CFO, you plan to set aside now enough money to fully fund the pension. Youve been assured by your insurance company that they will pay you a 7% annual return on fund deposited with them. The

American Association of University Professors objects to this program, however, because, they say, it fails to account for inflation. They propose an alternative plan in which payments would begin at $40,000 for the first year and grow thereafter at a fixed rate of 5% to accommodate expected increases in the cost of living. They argue that this plan should be good for the University too because it involves lower initial payments. How much will it cost you up front to fund each of these plans?