Question
After graduating from the University of Texas with a degree in Finance, Stan Morgan took a position as a stockbroker with Morgan Stanley in Austin.
After graduating from the University of Texas with a degree in Finance, Stan Morgan took a position as a stockbroker with Morgan Stanley in Austin. Although he had several college loans to make payments on, his goal was to set aside funds for the next eight years in order to make a down payment on a house. After considering the various suburbs of Austin, Stan chose Round Rock as his desired future residency. Based on median house price data, he learned that a three-bedroom, two-bath house currently costs $275,000. To avoid paying Private Mortgage Insurance (PMI), Stan wanted to make a down payment of 20%. Because it will be eight years before Stan buys a house, the $275,000 price will surely not be the same in the future. To estimate the rate at which the median house price will increase, he considered the historical price appreciation in Round Rock. In the past, homes appreciated by 4% per year. Stan was satisfied with this estimation. Morgan Stanley offers several opportunities for Stan to invest the funds that will be devoted to the purchase of his future home. He feels that a balanced account of stocks, bonds, and government securities would realistically achieve an annual rate of return of 8%.
Question: Take your answer from number 3 and multiply it by 12 to determine Stans total deposits per year when making 12 monthly deposits. Compare that to your end-of-year deposit answer from number 4. Explain why Stans total deposits per year (when making 12 monthly deposits) is less than when making one annual deposit per year.
answer from 3: $562.28
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