# 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 Now**a. **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**.

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