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Suppose that you are saving for college for a child. That child was just born and you will have to make 4 equal tuition payments over a four year period with the first occurring in exactly 18 years. Each successive tuition payment is made exactly a year after the prior payment. You also plan on buying this child a car in exactly 15 years using this same savings. You will pay $30,000 at that time for the car. You will be depositing money every year with the first check deposited into savings today and the last one the day the first tuition check is due. If you want to be able to pay $65,000 each year for tuition, how much do you have to save per year? Assume the discount rate is 10 percent per year.

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You just won the lottery and would like to set some money aside to pay for your child’s education. As of today, the tuition cost is $30,000 per year at the undergraduate level and $55,000 per year for a two-year master’s program. The rate of inflation for educational services is 3.5% annually and you can invest at a fixed nominal interest rate of 7% APR with annual compounding. Your child will enter a 4-year undergraduate program 16 years from today and upon graduation will immediately enroll in a two-year master’s program. Assuming tuition is to be paid at the beginning of the year, find the amount of tuition for years 1-4 of undergraduate education and years 1-2 at the graduate level. How much money will you have to invest today to pay for your child’s education? Show all work and round dollar amounts to the nearest cent. You must show all your work, including calculator keystrokes if applicable.

9) You have a 3-year old child, who appears to be brilliant. You think she will clearly get a scholarship to Cal Tech when she graduates high school 12 years from now, where she will get a BA in theoretical astrophysics and stochastic calculus. But, just in case, you decide to save for her education immediately. You expect that she will get some student loans, enough to pay 70% of her tuition, which is currently $63,500 per year, but you expect tuition will increase at 5% annually. You plan on buying zero coupon bonds (YTM = inflation rate + 1.25%). If inflation stays steady at 2.5%, how much will you need to save to finance 50% of her tuition for 4 years?

a) $7,XXX.XX

b) $X,8XX.XX

c) $X,0XX.XX

d) $5,XXX.XX

10) Refer to Q 9. You currently earn $40,000 annually, you assume that your salary will rise annually at 4%, and you are able and willing to save up to 14% of your annual pre-tax income for your child’s education. Is there a shortfall? If so, how much?

a) No, the FV of the savings are roughly the same as the tuition.

b) No, and the FV is more than enough, you can reduce savings to 10% of pre-tax salary.

c) Yes, at least 17% of pre-tax salary needs to be saved.

d) What’s the point? Her student loans will be too much anyway.

You would like to save enough to be able to afford a collegetuition payment of $60,000 per year for four years. Your first yearof tuition will be in 18 years. You are advised that if you save$5,000 per year and earn 9% per year compounded annually you willachieve your financial goal.

The advice you have recieved is correct.

True or False??

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