Question 1. Time value of money You are giving personal financial planning advice to your parents. Both of your parents have worked for Air New Zealand for 15 years. They have savings of $100,000 invested in Air New Zealand's ordinary shares. They expect to be able to earn 6% compounded monthly on any investments or savings. Your parents wish to retire in 20 years. In retirement, they desire to have $5000 of monthly income for 25 years. At this point, they expect to die (or have you take care of them). Due to their great loyalty to Air New Zealand, they wish to invest their savings in Air New Zealand ordinary shares. Formulas are provided on the last pages of this question booklet. Required: For parts a-e show your workings! a. Draw a timeline showing your parents' financial plan. (2 marks) b. How much will your parents have to save by May 2039, when they retire, so that they can get their desired monthly income from then on? (4 marks) c. Find the present value today) of the amount they will have to save by retirement (the amount you calculated in (b)). (4 marks) d. What monthly savings will they need to make from now until retirement in order to save the amount they need to fund their retirement (the future amount you calculated in (b))? (7 marks) e. If an alternative investment opportunity becomes available that provides a 6.25% return compounded semi-annually (every six months), should they continue with their current savings account or switch to this alternative? Why? (4 marks) f. In words only, tell your parents what mistake they are making by having all their savings in Air New Zealand. (4 marks) TOTAL: 25 MARKS Question 1. Time value of money You are giving personal financial planning advice to your parents. Both of your parents have worked for Air New Zealand for 15 years. They have savings of $100,000 invested in Air New Zealand's ordinary shares. They expect to be able to earn 6% compounded monthly on any investments or savings. Your parents wish to retire in 20 years. In retirement, they desire to have $5000 of monthly income for 25 years. At this point, they expect to die (or have you take care of them). Due to their great loyalty to Air New Zealand, they wish to invest their savings in Air New Zealand ordinary shares. Formulas are provided on the last pages of this question booklet. Required: For parts a-e show your workings! a. Draw a timeline showing your parents' financial plan. (2 marks) b. How much will your parents have to save by May 2039, when they retire, so that they can get their desired monthly income from then on? (4 marks) c. Find the present value today) of the amount they will have to save by retirement (the amount you calculated in (b)). (4 marks) d. What monthly savings will they need to make from now until retirement in order to save the amount they need to fund their retirement (the future amount you calculated in (b))? (7 marks) e. If an alternative investment opportunity becomes available that provides a 6.25% return compounded semi-annually (every six months), should they continue with their current savings account or switch to this alternative? Why? (4 marks) f. In words only, tell your parents what mistake they are making by having all their savings in Air New Zealand. (4 marks) TOTAL: 25 MARKS
