ANNUITIES: EVEN CASH FLOWS 1. (1pt) You are considering investing in an ordinary annuity vehicle that pays $500 every 6 months for the next 10 years. If the annuity pays 6% APR compounded semi-annually what would you be willing to pay for this to 2. (1pt) You can afford $3,500 each month for your mortgage payment. If the bank is charging 3.5% APR compounded monthly for a 30 year fixed rate loan, how much can you borrow for your house? Note: mortgages are ar nodinnon.nnnuits. 3. (1pt) PV ANNUITY. If the mortgage in the problem above was an annuity due, how much more could you borrow for your house? 4. (1pt) The reason that you can borrow more with an annuity due, meaning the PV is higher, is: a. Because the discount rate is lower b. Because the lender is getting the first payment earlier so it's worth more c. Because the PV of the earlier payment is lower 5. (1pt) If you were evaluating what you would be willing to pay for an annuity, and your required return INCREASED from 10% to 14%, what would happen to the amount that you would be willing to pay? a. Increase b. Decrease - if you discount the cash flows at a higher rate, the PV would be lower c. It would not change