a) You are planning a round-the-world travel extravaganza with friends, with the departure date five years from today. The cost of such a trip today is $10,000, but you expect the cost in five years to increase at the expected rate of inflation (2%). You are only able to invest $150 per month (times are tough!) towards the trip cost. What annual rate of return on your $150 monthly investment will you need to acquire enough money to pay for the trip?
b) Your investment broker has offered you a rather unusual 8-year security that makes quarterly payments of $40 (every 3 months), and repays 25% of its face value ($1000) at two year intervals. Summarizing: this security pays 1) $40 every quarter for the next eight years and 2) $250 at the end of year 2, 4, 6, and 8. How much is it worth, assuming an 8% yield?
The solution explains two questions relating to time value of money