Assume that today is one month before your 25th birthday and that you have decid

ID: 2698613 • Letter: A

Question

Assume that today is one month before your 25th birthday and

that you have decided that you wish to retire at age

65. You have determined that if you make a deposit

today in an investment account, and then make an equal deposit

every 15 months (every 5 quarters) thereafter, that you will make a

33rd and final deposit the day you turn 65. You

believe that by taking on some risk, you can earn a nominal annual

return of 12 percent, but where interest is compounded quarterly (3

percent every 3 months). At age 65 (right after making

your last deposit) you hope to take the money that you have saved

and purchase a guaranteed annuity from an insurance company that

will pay you $50,000 in each of Years 66 through 85 (20

payments). Since this annuity is guaranteed, the

appropriate discount rate for its cash flows is only 4 percent, but

interest will be compounded semi-annually (2 percent every 6

months).

Using the above information how would you find the deposit

(15-month rate). The answer is (1.03)^5 - 1 = 15.9274%. However I

need to know how to solve this calculation by totally using HP

10bII cacluator with the interest conversion keys i.e. (NOM%, EFF%,

P/YR). A step by step instruction would be really nice.

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