What is the present value of the following cash flow stream at a rate of 12.0%?

Week Four Problem Set

Reminder: Per the instructor’s policies, calculations (on how answers were derived) must be shown for each of the problems (1-10) below. See Instructor Announcements for sample submission document

Problem 1

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Problem 2

a) Compute the future value of a 9%, 5-year ordinary annuity that pays $600 each year.

b) Assume that payments are made at the beginning of the year. Find the future value using the given information from part (a).

Problem 3

You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

Problem 4

The APY for a savings account with a stated APR of 5% compounded daily is closest to ________.

A) 5.64%

B) 6.15%

C) 5.13%

D) 6.66%

Problem 5

What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Problem 6

Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?

Problem 7

A bank offers a loan that will requires you to pay 7% interest compounded monthly. Which of the following is closest to the APY charged by the bank?

Problem 8

What is the present value of the following cash flow stream at a rate of 12.0%?

Years: 0 1 2 3 4

| | | | |

CFs: $0 $1,500 $3,000 $4,500 $6,000

Problem 9

A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?

Problem 10

Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car?

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