What if the interest rate were 10 percent

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Some friends of yours have just had a child. Thinking ahead, and realizing the power of compound interest, they are considering investing in their child's college education, which will begin in 18 years. Assume that the cost of a college education today is $125,000. Also, assume there is no inflation and no tax on interest income used to pay college tuition and expenses.

a. If the interest rate is 5 percent, how much money will your friends need to put into their savings account today to have $125,000 in 18 years?

b. What if the interest rate were 10 percent?

c. The chance that the price of a college education will be the same 18 years from now as it is today seems remote. Assuming that the price will rise 3 percent per year and that today's interest rate is 8 percent, what will your friend's investment need to be?

Reference no: EM133253530

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