Asked by Narasingam Balakrishnan on May 07, 2024
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Mr. Parmar wants to retire in 20 years and purchase a 25-year annuity that will make equal payments at the end of every quarter. The first payment should have the purchasing power of $6,000 in today's dollars. If he already has $54,000 in his RRSP, what contributions must he make at the end of every half-year for the next 20 years to achieve his retirement goal? Assume that the rate of inflation for the next 20 years will be 2.5%, the RRSP will earn 8% compounded semi-annually, and the rate of return on the fund from which the annuity is paid will be 5.5% compounded quarterly.
Compounded semi-annually
Accumulation method for interest where the interest is applied to the principal twice a year, thereby influencing the total amount of interest earned or paid.
Rate of inflation
The measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Purchasing power
The worth of a currency measured by how many goods or services one unit of it can purchase.
- Grasp and implement the time value of money fundamentals to estimate the present and future values of various financial tools.
- Calculate the necessary volume and duration of payments to achieve certain fiscal aims, like funding for retirement, loan redemptions, and saving for schooling or future financial needs.
- Determine the impact of inflation on savings and investment strategies.
Verified Answer
Learning Objectives
- Grasp and implement the time value of money fundamentals to estimate the present and future values of various financial tools.
- Calculate the necessary volume and duration of payments to achieve certain fiscal aims, like funding for retirement, loan redemptions, and saving for schooling or future financial needs.
- Determine the impact of inflation on savings and investment strategies.
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