1. Endowment at WestMount University decreased by $1 billion following a meltdown in the stock market. Prior to the stock market losses, the University had a balanced budget. Now, the University does not hope that the market will recover. Assuming that the University will remain open and that long-term interest rate (expected rate of return on the endowment) remains at 4%, by how much should WestMount University lower annual spending to balance its books?
2. Your pension will pay approximately £6,000 a year[1]. British government 20-year bonds yield 2.60%[2]. You are offered a lump sum in return for a waiver on annual payments. How much should you ask for?
3. At your daughter's 6th birthday party she tells you that she wants to go to Princeton. It will cost you $30,000 per year for her to attend this four year program. You start putting money into an account that pays 14% annually. You will begin to make deposits on her next birthday and continue this practice until her 17th birthday. She starts college on her 18th birthday*. The second is payable on her 19th birthday and so on. How large are the annual deposits you make to this account?
* first tuition payment