ASSIGNMENT #1 (15 marks) Name (Last, First):_______________________________

Student No.:_________________

USE 4 DECIMAL PLACES (rounded)− i.e., 1.2345% or .6789- for intermediate

calculations and round your final answer to two decimal places. For amounts involving
dollars and cents, use two decimal places.
Question 1 (6 marks)
(a) Assume that a pension plan offers to pay $300,000 on a person’s retirement (his/her sixty-fifth
birthday) or a semi-annual annuity for the remainder of the person’s life – i.e., starting 6 months
from the date of retirement and including his/her date of death. Interest rates are 8 percent
compounded semi-annually, and a person’s life expectancy has been determined statistically as
being 80 years. Calculate the amount of the annuity that would make a person indifferent
between the options? (3 marks)

(b) A person joins a pension plan at age 35. How much will s/he have to pay into the pension fund
each year in order to accumulate a balance of $250,000 by the time s/he retires (age 65)?
Assume that the payments start on his/her 35th birthday and the final payment is on his/her 60th
birthday. Interest rates are 7% compounded annually. (3 marks)

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Question 2 (9 marks)
(a) Laura Smith is planning for her and her husband Luke’s retirement. Both Luke and Laura
expect to retire in 35 years (when they turn 65). The life expectancy of men is 75 years and
the life expectancy of women is 85 years (i.e., assume that they die the day before their 75th
or 85th birthday). During retirement (while they are living), the couple wants to withdraw
$10,000 at the beginning of each year from their savings account- $5,000 for each of them.
Assume that the interest rate during their retirement is 10 percent compounded annually; the
interest rate after Luke dies is 12% compounded semi-annually; and, the interest rate prior to
retirement is 9 percent compounded annually. How much will they have to deposit in their
joint savings account each month (beginning one month from now and ending on their
retirement date)? (6 marks)

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(b) How would your answer change if Luke and Laura Smith expect to inherit $40,000, 5 years
from now? Assume that, at that time, they will spend $10,000 for a two-week luxury
all-inclusive cruise, spend $25,000 to buy top-of-the-line stainless steel appliances for their
kitchen, and save the rest for their retirement. Assume equal monthly payments throughout
the 35 years to retirement- i.e., the same monthly payments beginning one month from now
and ending on their retirement date. (3 marks)