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Simple Interest versus Compound Interest First City Bank pays 8percent simple interest on its savings account balances, whereas SecondCity Bank pays 8 percent interest compounded annually. If you made a$5,000 deposit in each bank, how much more money would you earn fromyour Second City Bank account at the end of 10 years?2. Calculating Future Values Compute the future value of $1,000compounded annually fora.10 years at 5 percent.b. 10 years at 10 percent.c. 20 years at 5 percent.d. Why is the interest earned in part (c) not twice the amount earned in part(a)?3.4.5.6. Calculating the Number of Periods At 8 percent interest, how long does ittake to double your money? To quadruple it?7. Calculating Present Values Imprudential, Inc., has an unfunded pensionliability of $630 million that must be paid in 20 years. To assess the valueof the firmâ€™s stock, financial analysts want to discount this liability back tothe present. If the relevant discount rate is 7.1 percent, what is the presentvalue of this liability?8. Perpetuities An investor purchasing a British consol is entitled to receiveannual payments from the British government forever. What is the price ofa consol that pays $150 annually if the next payment occurs one year fromtoday? The market interest rate is 4.6 percent.9.Calculating Annuity Present Value An investment offers $4,900 per year for 15years, with the first payment occurring one year from now. If the required return is8 percent, what is the value of the investment? What would the value be if thepayments occurred for 40 years? For 75 years? Forever?10.Calculating Perpetuity Values The Perpetual Life Insurance Co. is trying to sellyou an investment policy that will pay you and your heirs $15,000 per yearforever. If the required return on this investment is 5.2 percent, how much will youpay for the policy? Suppose the Perpetual Life Insurance Co. told you the policycosts $320,000. At what interest rate would this be a fair deal?
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Apr 29 2021