Home / Questions / You plan to go to Asia to visit friends in three years The trip is expected to cost a tota...
You plan to go to Asia to visit friends in three years.
The trip is expected to cost a total of $10,000 at that time. Your parents have
deposited $5,000 for you in a Certificate of Deposit paying 6% interest
annually, maturing three years from now. Uncle Lee has agreed to pay for all
remaining expenses. If you are going to put Uncle Lee’s gift in an investment
earning 10% over the next three years, how much must he deposit today, so you
can visit your friends three years from today?
A) $3,757
B) $3,039
C) $5,801
D) $3,345
32) A zero coupon bond pays no annual coupon interest
payments. When it matures at the end of 7.5 years it pays out $1,000. If
investors wish to earn 2.35% per year on this bond investment, what is the
current price of the bond? (Round to the nearest dollar.)
A) $533
B) $561
C) $875
D) $840
33) Which of the following conclusions would be true if you
earn a higher rate of return on your investments?
A) The greater the present value would be for any lump sum
you would receive in the future.
B) The lower the present value would be for any lump sum
you would receive in the future.
C) Your rate of return would not have any effect on the
present value of any sum to be received in the future.
D) The greater the present value would be for any annuity
you would receive in the future.
34) Your parents are complaining
about the price of items today compared to what they cost years ago. If an
automobile that cost $12,000 in 1980 costs $40,000 in 2010, calculate the
annual growth rate in the automobile’s price.
35) You borrow $30,000 and agree to
pay it off with one lump sum payment of $40,000 in 6 years. What annual rate of
interest will you be charged?
36) You just invested $50,000 into
an account that earns 7 percent compounded annually. At the end of each year
you can withdraw $4,971. How many years can you continue to make the
withdrawals?
37) Bill wants to buy a new boat in 7 years. He expects the
new boat will cost $28,000. Bill has $18,000 in an investment account today.
What rate of return must Bill earn on his investments to be able to buy the
boat on time?
Learning Objective 2
1) If the future value of annuity A is greater than the
future value of annuity B, then the present value of annuity A must also be
greater than the present value of annuity B.
2) The future value of an annuity will increase if the
interest rate goes up, but the present value of the same annuity will decrease
as the interest rate goes up.
3) If the future value of an annuity is known, then the
present value of the annuity can be found using the present value of a lump sum
formula, even if the amount of each annuity payment is unknown.
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