Instructions:

Answer all the questions clearly. Draw timelines where appropriate and show your work. If you use your calculator, write down the appropriate keystrokes.

For hand-written solutions, make sure that they are legible and clear.

(a) What is the future value of an initial $100 after 3 years if it is invested in an account paying 10 percent annual interest?

(b) What is the present value of $100 to be received in 3 years if the appropriate interest rate is 10 percent?

(a) What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10 percent?

Suppose someone offered to sell you a note that would pay $1,000 fifteen months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit that pays 6.76649 percent nominal rate with daily compounding, which is a 7 percent effective annual interest rate, and you plan to leave the money in the bank unless you buy the note. The note is not risky- you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (a) by comparing your future value if you buy the note versus leaving your money in the bank, (b) by comparing the PV of the note with your current bank account, and (c) by comparing the EAR on the note versus that of the bank account. Case 1 FNBSLW 344 Instructions: 1. Answer all the questions clearly. Draw timelines where appropriate and show your work. If you use your calculator, write down the appropriate keystrokes. 2. For hand-written solutions, make sure that they are legible and clear. 1. (a) What is the future value of an initial $100 after 3 years if it is invested in an account paying 10 percent annual interest? (b) What is the present value of $100 to be received in 3 years if the appropriate interest rate is 10 percent? 2. (a) What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10 percent? (b) What is the present value of the annuity? (c) What would the future and present values be if the annuity were an annuity due? 3. Suppose someone offered to sell you a note that would pay $1,000 fifteen months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit that pays 6.76649 percent nominal rate with daily compounding, which is a 7 percent effective annual interest rate, and you plan to leave the money in the bank unless you buy the note. The note is not risky- you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (a) by comparing your future value if you buy the note versus leaving your money in the bank, (b) by comparing the PV of the note with your current bank account, and (c) by comparing the EAR on the note versus that of the bank account