Textbook Problem

REACHING A FINANCIAL GOAL Allison and Leslie, who are twins, just received $10,000 each for their 25th birthday. 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 13% per year in the fund’s relatively short history.

1. a. If the two women’s funds earn the same returns in the future as in the past, how old will each be when she becomes a millionaire?
2. b. Flow 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?
3. c. Is it rational or irrational for Allison to invest in the bond fund rather than in stocks?