3.

Which of the following do you prefer most if you ex

pect 7% annual rate of return?

A.

Pay $100 now and receive $60 today and $60 in four

years.

B.

Pay $200 now and receive $12 every year, forever.

C.

Pay $50 annually for five years, starting now, and

receive $30 annually for twenty years, starting

the end of the sixth year.

D.

Pay $50 now and receive $9 every other year, foreve

r, with the first payment being next year.

4.

In Aug. 2007, Irene Engels borrowed $50,000, and sh

e borrowed another $50,000 in Aug. 2008, for

Education. Her student loan has an annual interest

rate of 2% compounded monthly. Irene didn't

make any payments on her student loan until she sta

rted a lucrative job in Sep. 2009, when she started

to make a payment of $1,000 at the end of every mon

th. Now bonus time is coming near. For Jan.

2010, she plans to make another $1,000 payment (her

5

th

) and also apply her bonus to the loan. How

big must her bonus be so that she will have complet

ely paid-off the loan at the end of this Jan.?

5.

You and two friends are considering to buy a house

after graduation. You can get a 15-year fixed-

rate mortgage with 5% interest rate if you make a 2

0% down payment on the house. You will split

the monthly mortgage payment equally between the th

ree of you. Each of the three of you can afford

to contribute up to $1,000 per month towards the mo

rtgage payment. You each have $10,000

available towards the down payment. How expensive

a house can you afford to buy?

6.

You plan to retire 33 years from now. You expect t

hat you will live 27 years after retiring. You wan

t

to have enough money upon reaching retirement age t

o withdraw $180,000 from the account at the

beginning of each year you expect to live, and yet

still have $2,500,000 left in the account at the ti

me

of your expected death (60 years from now). You pl

an to accumulate the retirement fund by making

equal annual deposits at the end of each year for t

he next 33 years. You expect that you will be able

to earn 12% EAR per year on your deposits. However

, you only expect to earn 6% EAR per year on

your investment after you retire since you will cho

ose to place the money in less risky investments.

What equal annual deposits must you make each year

to reach your retirement goal