1. Your client is 36 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $4,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 6% in the future.

If she follows your advice, how much money will she have at 65? Do not round intermediate calculations. Round your answer to the nearest cent.

$

How much will she have at 70? Do not round intermediate calculations. Round your answer to the nearest cent.

$

She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Do not round intermediate calculations. Round your answers to the nearest cent.

Annual withdrawals if she retires at 65: $

Annual withdrawals if she retires at 70: $

2. You read in The Wall Street Journal that 30-day T-bills are currently yielding 4.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:

Inflation premium = 3.50%

Liquidity premium = 1.0%

Maturity risk premium = 2.15%

Default risk premium = 2.45%

On the basis of these data, what is the real risk-free rate of return? Round your answer to two decimal places.

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3. An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross-product between the real rate and inflation. If the real risk-free rate is 5% and inflation is expected to be 8% each of the next 4 years, what is the yield on a 4-year security with no maturity, default, or liquidity risk? (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look".) Round your answer to two decimal places.

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