A practitioner in pension finance was given three (3) options to advise the stakeholders. Study the options and advise accordingly.
Option A
At the university, there was a creation of an endowment to allow three (3) needy students to take the introductory finance course each year in perpetuity. The guaranteed annual cost of tuition and books for Sh.600 per student. The endowment will be created by making a single payment to the university, which expects to earn exactly 6% per year on the funds.
Advise:
a) How large an initial single amount must Paul’s parents present to the university to fund the
endowment? (3 marks)
b) What amount would be needed to fund the endowment if the university could earn 9% rather than 6% per year on the funds (3 marks)
Option B
Matano upon retirement came across the following investment regimes;
a) 12% p.a compounded annually
b) 11% p.a compounded quarterly
c) 10% p.a. compounded monthly
d) 9.85% p.a compounded continuously
advise
i) As a rational lender which one would you choose? (3 marks)
ii) As a rational borrower which of the regimes would you choose? (3 marks)
Option C
Madam Aisha recently in her life insurance premium benefits, had a mortality male claim for a one-year term policy, with a given face amount and an interest rate; Sh.69,500, 3.5%, age 28 while female claim was; Sh.120,000, 5.5% , age 52 four-year age reduction.
Advise;
Madam Aisha on both net premium claim benefits expected