Question

(5-6) The State of Pennsylvania has a guaranteed tuition plan. Basically, you can prepay for education in the future (say, for your kids) by paying today's tuition rate. Billy Gate wants to buy one year of education for his daughter at ESU, to be used 5 years from now. Today's tuition rate is $8,600 (in-state). Assume that tuition rates will increase by 5% per year for the next 5 years. Q5: (2 points) What will tuition be in 5 years? Q6: (3 points) If Billy can invest in government Education Bonds (non-taxable) at 7% interest (compounded annually), how much would it cost to buy a bond that will be worth the above amount in 5 years?

Answer 1

Current Tution rate 赫(MM) 5% Increment rate p.a. Tuttion Fees after 5yrs8600 x (1.05)A5 S5. 10976.02 Bond Value after 5 Years10976.02 S6. Int rate on Govt. Bonds- 7% 10976.02/ (1.07)AS Present Value of Bonds = 7825.75 Thus if Billy Invest $7825.75 in Govt Education Bonds today, It will be equivalent to the Tution fees after 5 years