John Doe has developed a financial retirement strategy. His plan is to invest in

Question

John Doe has developed a financial retirement strategy. His plan is to invest in somewhat risky stocks for 15 years and then move everything to low risk bonds for the retirement years as described below.

John presently has $250,000 in a retirement account that will be invested in a stock fund that has historically earned 12% annually (EAR) with no dividends. The plan is to add an additional $25,000 to the fund at the beginning of each of the upcoming 15 years.

When he retires, he will reinvest the stock fund in a tax-free municipal bonds and live on the coupons only that have a coupon rate of 2.5% paid semi-annually.    (the bonds will be donated to charity upon his death).

How much will John receive semi-annually during retirement?

PLEASE USE EXCEL

Explanation / Answer

$250000 at the end of fifteen years = Amount(1+r%)^n = $250000(1+0.12)^15 = $1,368,391 $25000 deposited in the beginning of every year for fifteen years, at the end of fifteen years = Amount[{(1+r%)^n-1}/r%] = $25000[{(1+0.12)^15-1}/0.12} = $931,993 Total amount at the end of fifteen years = $2,300,384 ANSWER: Therefore, semi-annual payment after investing in low risk tax free municipal bonds = (amount invested * coupon rate)/n = ($2300384 *2.5%)/2 = $28,754.80 = $28754.8(ANSWER)

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