Reference no: EM132842745
1) Which of the following descriptions are correct? There are more than one answer.
a) If a bank compounds savings accounts quarterly, the quoted annual percentage rate will exceed the effective annual rate
b) All other things held constant, the present value of a given annuity increases as the number of compounding periods per year increases.
c) All else equal, the price of a deferred annuity is lower than an otherwise ordinary annuity that makes the first payment in a year.
d) All other things held constant, the future value of a given annuity increases as the number of compounding periods per year increases.
e) The cash flows for an ordinary annuity all occur at the beginning of the periods.
2) You want to accumulate $X in N years. You figure that you will need to save $C at the end of each year to reach the financial goal. If you make the saving at the beginning of each year, what should be your annual saving to accumulate the same amount $X in N years? Assume the interest rate is the same as i.
a) $C
b) $C/(1+i)
c) $C*(1+i)
d) $X/N
3) X and Y are equally risky n-payment annuities, with identical annual payment $C and the same market required interest rate i. The only difference is that X will make the first payment today and Y will make the first payment one year from now. If the market price of X is $P, what should the price of Y?
a) $P*(1+i)
b) $P/i
c) $P/(1+i)
d) $P
4) You hold an annuity that pays $24,000 at the end of each year for 5 years. The on going interest rate on the annuity is 4.5%. Now you are thinking selling this 5-year annuity and use the proceeds to buy a 10-year annuity due. Assume the interest rate on the new annuity due is the same and ignore the transaction fees. What is the annual payment can you expect for the annuity due?
a) $12,741.82
b) $10,986.24
c) $13,005.84
d) $15,600.92
5) What is the price of a deferred annuity with 5 payments of $8,500 that starts 5 years from now and the appropriate interest rate is 4.5%?
a) $37,314.8
b) $31,290.75
c) $29,943.3
d) $32,698.83
6) Assume the average expected annual inflation rate for next 30 years is 2%. A $100,000 income in 30 years in today's purchasing power is
a) 56,300.02
b) 55,207.09
c) 53,665.26
d) 59,038.15
7) Suppose your credit card issuer charges an effective annual rate of 26.51%. You must make monthly credit card payments, which amounts to monthly compounding. The bank's nominal quoted annual percentage rate is
8) A State of California 10-year zero coupon bond with $1,000 face value was issued two years ago. If the going interest rate on these bonds is 6.6%, the bond is worth $ today.