Suppose you have a 2-year old son and you want to provide $225,000 in 16 years towards
Question:
Suppose you have a 2-year old son and you want to provide $225,000 in 16 years towards his college education. You currently have $10,000 to invest.
A. (2 points). What interest rate must you earn to have $225,000 when you need it?
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B. (2 points). You look up historical returns on S&P500, and realize they are 10% -- much lower than the implied interest rate you hoped to earn. If you invest your money into S&P500, how much money are you going to have on your account in 16 years?
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C. (2 points). Clearly, you won’t have enough money for your kid’s education when he needs it. How long do you need to keep the money on the account to have the needed $225,000 for your child?
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D. (2 points). How much money do you need to invest today (instead of $10,000 you planned to invest initially) so that you have $225,000 in 16 years?
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Expert Answer:
A To calculate the interest rate you must earn to have 225000 when you need it you can use the future value FV formula FV PV 1 rn where FV Future valu... View the full answer
