2. Deferred annuities Aa Aa Deferred annuities are contracts that allow investors to delay payments, income, installments, or a lump-sum amount until the investor decides to receive them. Annuities will be referred to as deferred annuities if the payments begin more than one year in the future. Consider the case of Jessica, who is 50 years old and has loved animals all her life. She wants to make a donation to the animal shelter near her house, but she is a little worried about her post-retirement income. Therefore, Jessica decides to invest in a charitable gift annuity in which the animal shelter promises to pay Jessica $10,000 each year for four years after she turns 65. The payments will be made at the end of each year. The contract of the charitable gift annuity includes an annual rate of return of 6%. How much money should Jessica deposit in the charitable gift annuity to receive $10,000 for four years after she turns 65 years old? $14,681.49 $11,153.54 $14,458.67 $10,522.21 3. Nonannual compounding period A Aa The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An investor can invest money with a particular bank and earn a stated interest rate of 13.20%; however, interest will be compounded quarterly. What are the nominal and effective interest rates for this investment opportunity? Interest Rates Nominal rate Effective annual rate You want to invest $24,000 and are looking for safe investment options. Your bank is offering you a certificate of deposit that pays a nominal rate of 12% that is compounded daily. What is the effective rate of return that you will earn from this investment? 12.747% 12.930% 12.924% 12.832% Suppose you decide to deposit $24,000 in a savings account that pays a nominal rate of 13%, but interest is compounded daily. Based on a 365-day year, how much would you have in the account after three months? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.) $24,049.32 $25,660.87 $24,793.11 Under what circumstances would a firm be more likely to buy the required number of bonds in the open market as opposed to using one of the other procedures? When interest rates are higher than they were when the bonds were issued When interest rates are lower than they were when the bonds were issued