Week 2 Discussion – Time Value of Money

Stock market Returns

What kind of returns might you expect in the stock market? One way to measure how the stock market has performed is to examine the rate of return of the S&P 500 Index. To see historical prices of the S&P 500 Index, go to Yahoo! Finance (finance.yahoo.com) and click on the “S&P” link on the top left-hand side. Then click “Historical Prices” on the left menu, select “Monthly” prices, and click the “Get Prices” button.

Required: Compute the 1-year, 5-year, and 10-year returns over time. Include the results of your calculations in the discussion. What do you conclude about the returns during each of these periods?

Retirement Income Calculators

The Internet provides some excellent retirement income calculators. You can find one by Googling “retirement income calculator.” Many of the calculators allow you to determine your predicted annual income from a retirement nest egg under different assumptions. For example, you can spend only the investment income generated from the nest egg. Most retirees try not to touch the principal. Or, you can spend both the income and the nest egg itself. These calculators let you input the size of the retirement wealth and the investment return to be earned. They then make time value computations to determine the annual income the nest egg will provide.

Required: Go to a retirement income calculator like the one at MSN Money. Use the calculator to create a retirement scenario. Use the TVM equations or a financial calculator to check the Internet results.

(http://money.msn.com/retirement/retirement-calculator.aspx)

Required: In a paragraph form discuss (1) What you concluded about the returns of the stock market during each of period? (2) Use the 10-year market return as a proxy for annual investment return when calculating your retirement income. Discuss what you have learned through this exercise and your retirement savings goals.

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