CHAPTER 5  Household Savings and Investment Decisions
EndofChapter Problems
1. Freds company has a definedbenefit pension plan. Suppose the plan pays a benefit equal to 1%
of final salary per year of service. Fred is 40 years old and has worked for the company for 15 years.
His last years salary was $50,000 and is expected to remain so in real terms until retirement. The
expected rate of inflation is 4%.
a. If normal retirement age is 65, the interest rate is 8%, and Freds life expectancy is 80, what is
the present value of his accrued pension benefit?
b. What efect should his pension benefit have on Freds planned saving assuming he has a 75%
target replacement rate?
Solution: a. Fred`s last year salary of $50,000 has a real growth rate of 0%, hence it will keep up with inflation
until retirement but not beat it. At retirement, he would have worked foor the company for a total of forty years.
¸ñÂ÷ Chapter 1: Financial Economics
Chapter 2: Financial Markets and Institutions
Chapter 3: Managing Financial Health and Performance
Chapter 4: Allocating Resources Over Time
Chapter 5: Household Saving and Investment Decisions
Chapter 6: The Analysis of Investment Projects
Chapter 7: Principles of Market Valuation
Chapter 8: Valuation of Known Cash Flows: Bonds
Chapter 9: Valuation of Common Stocks
Chapter 10: Principles of Risk Management
Chapter 11: Hedging, Insuring, and Diversifying
Chapter 12 Portfolio Opportunities and Choice
Chapter 13: Capital Market Equilibrium
Chapter 14: Forward and Futures Markets
Chapter 15: Markets for Options and Contingent Claims
Chapter 16: Financial Structure of the Firm
Chapter 17: Real Options
