Life Planning Using TVM:

Please show work so I have a better understanding.

1. You want to buy a $250,000 house 5 years from now. If you have no money to begin with, how much do you need to save at the end of each year to have 20% of the$250,000 purchase price? You plan to invest your savings with your broker who will allocate it into various asset classes. You hope to earn 8% on your money for the next 5 years. How much do you need to save at the end of each year? How does this change if you can only earn 6% return.

2. After a few years you decide that you should start saving for kids education. Since they will be entering college in ten years you want to match the maturity of the bond to the time when they will start college. Therefore you are considering a bond that matures in 10 years. The bond pays an 8% annual coupon. The yield on bonds of similar maturity and risk class are currently at 7%. Using the manual method to discount the cash flows (i.e. you must show the time line and the manual discounting), what is the most you will pay for the bond?

3.Even further down the road, you have enjoyed a successful career, your kids are grown and out of the house, and now you want to spend your days cruising the waterways around Wilmington. Like a lot of retirees you want to use your nest egg and have it provide a fixed income for you. Therefore you are considering investing in some bonds. One bond that you are considering has 20 years to maturity, but is callable in 10 years at $1090. Interest is paid 9% semi-annually; the bonds have a $1,000 par value; and currently sell for $950. Compute the yield to maturity and yield to call for the bonds. As an investor would you expect to get YTM or YTC?