Homework – Please answer the following questions.
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Question 1 – You have $3,600 to invest today at 7% interest compounded annually.
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Order Paper Nowa. Find how much you will have accumulated in the account at the end of (1)2 years, (2) 4 years, and (3) 6 years.
b. Use your findings in part a to calculate the amount of interest earned in (1) the first 2 years (years 1 to 2),(2) the second 2 years (years 3 to 4),and (3) the third 2 years (years 5 to 6).
c. Compare and contrast your findings in part b. Explain why the amount of interest earned increases in each succeeding 2–year period.
Question 2 – Without referring to the pre-programmed function on your financial calculator,use the basic formula for present value, along with the given discount rate,r,and the number of periods,n,to calculate the present value of $1 in the case shown below:
Opportunity cost, r : 18%, Number of periods, n – 12
Question 3 – Answer each of the following questions.
a. How much money would you have to invest today to accumulate $5,400 after 9 years if the rate of return on your investment is 11%?
b. What is the present value of $5,400 that you will receive after 9 years if the discount rate is 11%?
c. What is the most you would spend today for an investment that will pay $5,400 in 9 years if your opportunity cost is 11%?d. Compare, contrast, and discuss your findings in part a through c.
Question 4 – Using the values below, answer the questions that follow.
Amount of annuity – $2,000
Interest rate – 9%
Deposit period (years) – 7
a. Calculate the future value of the annuity, assuming that it is
(1) An ordinary annuity.
(2) An annuity due.
b. Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity — ordinary or annuity —is preferable as an investment? Explain why.
Question 5 – Consider the following case.
Amount of annuity – $42,000
Interest rate – 7%
Period (years) – 8
a. Calculate the present value of the annuity assuming that it is
(1) An ordinary annuity.
(2) An annuity due.
b. Compare your findings in parts a(1) and a(2).All else being identical, which type of annuity — ordinary or annuity—is preferable? Explain why.
Question 6 – Marian Kirk wishes to select the better of two 6-year annuities. Annuity 1 is an ordinary annuity of $1,970 per year for 6 years. Annuity 2 is an annuity due of $1,820 per year for 6 years.
a. Find the future value of both annuities at the end of year 6, assuming that Marian can earn (1)7% annual interest and (2)14% annual interest.
b. Use your findings in part a to indicate which annuity has the greater future value at the end of year 6 for both the (1) 7% and (2) 14% interest rates..
c. Find the present value of both annuities, assuming that Marian can earn (1) 7%annual interest and (2) 14% annual interest.
d. Use your findings in part c to indicate which annuity has the greater present value for both the (1) 7% and (2) 14% interest rates.
e. Briefly compare, contrast, and explain any differences between your findings using the 7% and 14% interest rates in parts b and d.
