REACHING A FINANCIAL GOAL
Allison and Leslie, who are twins, just received $25,000 each for
their 25th birthdays. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her “early retirement fund” on her birthday, beginning a year from today. Allison opened an account with the Safety First Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 8% per year in the past. Leslie invested in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and whose investors have earned an average of 20% per year in the fund’s relatively short history.
a. If Allison’s fund earns the same returns in the future as in the past, how old will she be when she becomes a millionaire? Do not round intermediate calculations. Round your answer to two decimal places.
b. If Leslie’s fund earns the same returns in the future as in the past, how old will she be when she becomes a millionaire? Do not round intermediate calculations. Round your answer to two decimal places.
c. How large would Allison’s annual contributions have to be for her to become a millionaire at the same age as Leslie, assuming their expected returns are realized? Do not round intermediate calculations. Round your answer to the nearest cent.
d. Is it rational or irrational for Allison to invest in the bond fund rather than in stocks? CHOOSE ANSWER BELOW
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