You would like to setup a trust fund for your two children to ensure that they...
You would like to setup a trust fund for your two children to ensure that they will be taken care of in the future. At the end of this year, you would like each of your children to receive $20,000 (2 x $20,000= $40,000 payment received at the end of the year), and you would like to have this amount grow at the rate of inflation, (which will be assumed to be 3.5% forever) How much do you need to have in the trust fund if you are able to receive 5% return on your investment indefinitely?
Homework Answers
Amount required in the fund is equal to present value of growing perpetuity
= Amount/(Rate of return - growth rate)
= 40,000/(5%-3.5%)
= $2,666,666.67
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