Imagine today is your 68th birthday and you decide to retire as of tomorrow morn
ID: 2804537 • Letter: I
Question
Imagine today is your 68th birthday and you decide to retire as of tomorrow morning. You have an annuity that pays you $80,000 per year but without an inflation adjustment. If inflation can be expected to average 6% per year, use the rule of 72 to determine how old you will be when the purchase power of your annuity has been cut in half to the equivalent of only $40,000. (This question is a slight variation on the way we talk about the Rule of 72 most of the time, but the logic is the same.)
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Suppose that the interest ("coupon") rate on a corporate bond is 8 percent. If you own one bond with a face value of $1,000, how much interest will you receive every six months from this investment?
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Imagine that a mutual fund company has $100 million in assets and $90 million in liabilities. If there are 200,000 shares of the fund, what is the net asset value per share?
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Willy Wise participates in his employer's 401(k) retirement plan and contributes $4000 in the course of the year out of his $60,000 income. (His employer matches Willy's contribution dollar for dollar.) Willy's contributions are tax deductible (i.e., deducted from his taxable income) and he is in the 25% federal income tax bracket. How much less does Willy pay in federal income taxes that year compared to a co-worker who makes the same salary but does not participate in the 401(k) plan?
72 years oldExplanation / Answer
Answer:
1. Rule 72, how long will it take purchasing power to reduce to $40,000 from current $80,000 when inflation rate of 6%.
It will require 12 years. The rule says = 72/R.
where, R = Inflation Rate.
2. $40 Coupon. Semi-annually (8/2)% of $1,000.
3. Net Assets per share = (Total Assets - Total Liabilities)/no. of shares = ($100-$90)/200000 = $ 50.
4. Employers contribution is not included in exemption to income taxes and only employee contribution is considered. Total savings is $1000 in income taxes from non-contribution employee.