Question 5

Part a) Cyril is thinking about the future of his only grandson Mike. He would like to help Mike out by investing some money that will guarantee him $12,500 per annum. If Cyril can invest at an interest rate of 9%, how much will he need to invest to ensure Mike receives this desired cash flow?

[4 marks]

Part b) What is a perpetuity?

[3 marks]

Part c) Anthony wants to go on a European holiday in three years time. He estimates he will need $6000 for the holiday. If Anthony invests $1800 at the end of each of the next three years, in an investment fund at a return of 11.4 per cent per year, how much will he have for the trip?

[5 marks]

Part d) What is the difference between an ordinary annuity and an annuity due?

[3 marks]