1. (a) Corporation XYZ can borrow for one year at a semi-annually compounded nominal interest rate of 6%.

i. What is the equivalent interest rate, compounded once per year?

ii. If the annualized inflation rate is 2.5%; what is the annually compounded real interest rate at which XYZ can borrow?

iii. Holding prices constant, how much of a return do investors demand for delaying consumption for a year?

(b) A company has recently set up a pension fund for its employees aiming to pay each of them $1,200 per month once they retire (over their remaining lifetime). In this company employees retire at the age of 65. The company believes that employees who reach retirement age have a life expectancy of 20 more years. The company wishes to set aside a certain amount of money for each employee reaching retirement age so that the pension payments can be fully funded out of the capital and interest earned on it over the remaining expected lifetime of each pensioner. The company expects to obtain a 6% annual return (compounded monthly) on the money set aside for pension payments. If the companys assumptions are correct, how much money does the company need to set aside for each employee when they retire?