QUESTION TWO [20]EFM101[JUNE2021]

2.1 Federica has recently seen a small house in Cape Town that she would like to buy. She thinks that it will be perfect for a new business: renting out rooms to tourists from Europe in the summer season. The house costs R4.5 million. Federica would like to borrow this money from her parents and repay them R4.5 million in ten years time. Federicas parents burst into laughter when she suggests this deal. Discuss critically why Federicas parents believe that this is not a good way for them to invest their pension? (10)

2.2 You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive R200 000 at the end of each year for the 30 years between retirement and death (you have estimated your death according to life mortality tables used by insurance companies). You know that you will be able to earn 11% per year during the 30-year retirement period.

2.2.1 How large a fund will you need when you retire in 20 years in order to provide the 30- year R200 000 per year retirement annuity? (5)

2.2.2 How much would you need to provide today as a single amount to the fund as calculated in (a) if you earn only 9% per year during the 20 years before retirement? (5)