Question
1. The $16.5 million lottery payment that you have just won actually pays $1.1 million per year for 15 years. The interest rate is 9%.
1. The $16.5 million lottery payment that you have just won actually pays $1.1 million per year for 15 years. The interest rate is 9%.
a. If the first payment comes in 1 year, what is the present value of the winnings?
b. What is the present value if the first payment comes immediately?
2.You believe you will need to have saved $400,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5% per year, how much must you save each year to meet your retirement goal?
3. A couple thinking about retirement decide to put aside $3,500 each year in a savings plan that earns 9% interest. In 15 years they will receive a gift of $15,000 that also can be invested.
a. How much money will they have accumulated 30 years from now? (accumulated savings)
b. If their goal is to retire with $850,000 of savings, how much extra do they need to save every year? (additional annual savings needed)
4. A store will give you a 5.00% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate being paid by customers who choose to defer payment for the month? (What is the EAR %)
5. What is the value of a perpetuity that pays $100 every 3 months forever? The interest rate quoted on an APR basis is 5.2%
6. Youve borrowed $7,939.58 and agreed to pay back the loan with monthly payments of $280. Assume the interest rate is 9% stated as an APR.
a. How long will it take you to pay back the loan? (Number of months)
b. What is the effective annual rate on the loan? (EAR)
7. You invest $1,100 at a 12% annual interest rate, stated as an APR. Interest is compounded monthly. How much will you have in 1.5 years? In 2 years?
8. If a bank pays 6.5% interest with continuous compounding, what is the effective annual rate? (EAR%)
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