Steve and Jenna want to prepare to be able to fund the future education costs of their 3-year old son, Joseph. He starts college 15 years from today. Tuition is currently

Steve and Jenna want to prepare to be able to fund the future education costs of their 3-year old son, Joseph. He starts college 15 years from today. Tuition is currently $11,500 per year. Room & board is about $6,000 per year. The only investment Steve and Jenna have made to pay for Joseph's college costs are 10 zero-coupon bonds that they purchased when Joseph was born. The face amount of each bond is $1000. The bonds were originally purchased for $490 each with an original maturity of 18 years. They are now scheduled to mature 15 years from today. They want to accumulate all the needed funding by the time Joseph enters college so that they can begin to save extra for their retirement he is in college. They also told you that Steve's father wants to help pay for Joseph's college education.

Estimate that Steve and Jenna will need to pay approximately $218,200 (Year 1 = $49,000, Year 2 = $52,500, Year 3 = $56,300, Year 4 = $60,400) for four years of tuition and room & board while their son attends college. If they earn an after-tax return of 8.5% during Joseph's 4 years in college, how much do they need to have at the start of Joseph's freshman year to fully pay for all 4 years?

Steve's father is willing to help accumulate some of the funds needed for Joseph's college costs. He is prepared to put a lump sum of $20,000 into an investment account today and make four additional annual deposits of $5,000 each year beginning in one year from today. If the investment account earns a compound annual after-tax rate of return of 4.5%, how much will be in the investment account four years from now (after the last deposit is made)?

Steve and Jenna decide they will try to accumulate the equivalent of $100,000 in today's dollars by the end of 15 years to help pay for Joseph's college costs. They want to do so through 15 annual deposits, starting immediately. The size of each annual deposit will be 5% higher than the previous one. This corresponds with the expected annual inflation rate and annual increase in the family's income during that period. They have decided to place the deposits in a mutual fund you recommended. The compound annual after-tax rate of return from your recommended fund is expected to be 7%. Based on these assumptions, how large should the initial deposit be?

 


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