Using the information below, answer the following questions: Robert recently gra
ID: 2655229 • Letter: U
Question
Using the information below, answer the following questions:
Robert recently graduated from business school and will start working for ACME Mutual Fund Group, Inc. next week. Currently, he is renting an apartment with his girlfriend, Spot, and dog, Rachel. He wants to be able to buy a house before asking Spot to marry him. The price of a median home today is at $350,000 and average annual price increase is expected to be at 5%.
Bob plans to invest $1,000 monthly in growth funds starting next month expecting an average return of 9%
a) Will Bob have the required 20% down payment on a median home within 3 years? How much would Bob have?
b) After waiting for 3 years, Spot left Bob but Rachel stayed. How much should Bob had invested monthly?
E2.1 A $20 Million 8-year bond pays 6.25% coupon with a 6% yield. Use the model to construct a 70% synthetic floater and 30% inverse-floater. The required synthetic has a 4% basis + 2% spread. Summarize your results including prices, price durations and convexities, multiples and ratios. Evaluate their various price sensitivities. Were the results what you expected? What were the model estimation errors?
Explanation / Answer
Answer:
a)
Calculation of amount of funds at the end of year 3
Future value of monthly installments = Monthly installment * Future value factor (12 *3= 36 Months , 9%/12 = 0.75%rate)
=
1000
X
41.15272
=
$41,152.72
Value of house at the end of year 3= Present value * (1+inflation rate)^3
= 350000*(1+0.05)^3
=
$ 405,168.75
Down payment required (20%)
$ 81,033.75
Hence bob will not have sufficient fund for the down payment
b)
Calculation of Monthly installment :
Required amount at the end of 36 months (A)
$ 81,033.75
Future value factor (B)
41.15272
Required monthly installment = A/B
$ 1,969.10
a)
Calculation of amount of funds at the end of year 3
Future value of monthly installments = Monthly installment * Future value factor (12 *3= 36 Months , 9%/12 = 0.75%rate)
=
1000
X
41.15272
=
$41,152.72
Value of house at the end of year 3= Present value * (1+inflation rate)^3
= 350000*(1+0.05)^3
=
$ 405,168.75
Down payment required (20%)
$ 81,033.75
Hence bob will not have sufficient fund for the down payment
b)
Calculation of Monthly installment :
Required amount at the end of 36 months (A)
$ 81,033.75
Future value factor (B)
41.15272
Required monthly installment = A/B
$ 1,969.10
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