Suppose that you are the manager of a newly formed retirement fund. You are to s

Question

Suppose that you are the manager of a newly formed retirement fund. You are to set up a series of semiannual payments to accumulate a sum of $1,000,000 in 10 years. The interest rate is 6% percent annually, compounded semiannually. The first payment into the fund will be made six months from today and the last payment will be at the end of the tenth year.

a. What is the required semi-annual payent, to the nearest dollar?

b. Immediately after the 4th payment at the end of the second year, interest rates have risen to 8% annually. You can earn that rate on funds already accumulated and the 16 future payents. Interest is to be compounded semi-annually on all funds. What is the revised payment that will allow you to reach your investent goal of $1,000,000.00

Explanation / Answer

a. N = 20, PV = 0, rate = 3%, FV = 1,000,000

use PMT function in Excel

semi annual payments = 37,216

b. now put N = 4 and calculate FV in Excel

value after 4th payment = 155,696.64

N = 16, FV = 1,000,000, PV = -155,696.64, rate = 4%

use PMT function in Excel

semi annual payments = 32,458

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