To Compute How Much You Would Need to Save Each

question 18

Multiple Choice

To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use

• A) the future value of an annuity.
• B) the present value of an annuity.
• C) both future and present value of an annuity.
• D) both present and future value of $1.

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Definitions:

Premium

The amount by which the price of a financial instrument or commodity exceeds its intrinsic or face value, often related to insurance costs or bond prices.

Maturity Risk Premium

An additional return that investors demand for holding a bond that has a longer time until maturity, reflecting the increased risk over time.

Interest Rates

The cost incurred by a borrower, represented as a proportion of the principal, for accessing a lender's assets.

Yield Curve

A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.