A father wants to save in advance for his 8-year old daughter’s college expenses.The daughter will enter the college 10 years from now. An annual amount of$20,000 in today’s dollars (constant dollars) will be required to support the college for 4 years. Assume that these college payments will be made at the beginning of each school year. (The first payment occurs at the end of 10 years). Thefuture general inflation rate is estimated to be 5% per year, and the interest rateon the savings account will be 8% compounded quarterly (market interest rate)during this period. If the father has decided to save only $1,000 (actual dollars) atthe end of each quarter until she goes to college (the last deposit occurs at the endof 10 years) how much will the daughter have to borrow to cover her sophomoreexpenses?(a) $4,120 (b) $4,314(c) $4,000 (d) $4,090
A father wants to save in advance for his 8-year old daughter’s college expenses.
The daughter will enter the college 10 years from now. An annual amount of
$20,000 in today’s dollars (constant dollars) will be required to support the college for 4 years. Assume that these college payments will be made at the beginning of each school year. (The first payment occurs at the end of 10 years). The
future general inflation rate is estimated to be 5% per year, and the interest rate
on the savings account will be 8% compounded quarterly (market interest rate)
during this period. If the father has decided to save only $1,000 (actual dollars) at
the end of each quarter until she goes to college (the last deposit occurs at the end
of 10 years) how much will the daughter have to borrow to cover her sophomore
expenses?
(a) $4,120 (b) $4,314
(c) $4,000 (d) $4,090
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