Q:

Janet Spears is planning to retire in 7 years and plans to start saving $15,000 a year beginning at the end of this year until the date she retires. She currently has $280,000 at the bank. Once she retires, she plans to start redeeming $21,000 each year for 26 years. If she can expect to earn 9% before her retirement and 7.5% after her retirement, which of the following answers would best describe her situation?
a) On her retirement date, she'll have a surplus of $412,568.
b) On her retirement date, she'll have a surplus of $35,245.
c) On her retirement date, she'll have a surplus of $142,895.
d) On her retirement date, she'll have a deficit of $35,245.

A:

The correct answer is: a)
Step 1: How much will she have accumulated her wealth by the time she retires?

PV = 280,000; PMT = 15,000; N = 7; I = 9%

Therefore, FV = 649.875

Step 2: How much will she need by her retirement date in order to finance her retirement
income?

PMT = 21,000; N = 26; I = 7.5%

Therefore, PV = 237,289

Step 3: Surplus/Shortfall at retirement

= (what she'll have) - (what she'll need)

= 649,857 - 237,289

Surplus = 412,568


2005 CFA Level 1 LOS: 2.1.A.a-2.1.A.c


RELATED FAQS

  1. A person whose registration has been revoked by an Administrator due to a felony ...

    The correct answer is a. The Administrator may suspend, deny or revoke registration in any capacity if the person has such ...
  2. Which of the following, under the NASD Conduct Rules, would constitute a complaint ...

    The correct answer is b. The NASD defines a “complaint” as adverse communications that are in writing. Choices I and III ...
  3. An investor has bought 25 call options on oil. The exercise price of the call is ...

    The correct answer is: a) Rule for a long call position: If at expiry, the asset price settles below the expiry price, Do ...
  4. Under the Investment Company Act of 1940, which of the following is not a formal ...

    The correct answer is d. A mutual fund is technically registered under the ’40 Act as an open-end management investment company. ...
RELATED TERMS
  1. No results found.
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center