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TVM FMP/FINANCIAL MANAGEMENT Lecture#1 1. You want to buy an ordinary annuity that will pay you $4,000 a year for the next 20 years. You expect annual interest rates will be 8 percent over that time period. The maximum price you would be willing to pay for the annuity is closest to 2. You are considering borrowing $10,000 for 3 years at an annual interest rate of 6%. The loan agreement calls for 3 equal payments, to be paid at the end of each of the next 3 years. (Payments include both principal and interest.) The annual payment that will fully pay off (amortize) the loan is closest to 3. With daily compounding(365) at 10 percent for 30 years, the future value of an initial investment of $2,000 is closest to 4. It is now January 1, 2002. Your plan to make 5 deposits of $200 each, one every 6 months, with the first payment being made today. If the bank pays a nominal interest rate of 11 percent but uses semiannual compounding, how much will be in your account after 10 years. 5. Use following information to answer next two questions: You deposited following stream of cash flow at the end of year: Year deposit rate of interest 5000 8% 4000 8.5% 7000 10% What will be total amount in your account at the end of 6 year? What is present value of your deposit? 8. You win a lottery with a prize of $1.5 million. Unfortunately the prize is paid in 10 annual installments. The first payment is next year. How much is the prize really worth? The discount rate is 8 percent. 9. Offered rate is 12 percent. a. You invest $1000 at this rate. What is the investment worth after five years? b. What is the PV of $5 million to be received in eight years? 10. Which would you prefer? a. An investment paying interest of 12 percent compounded annually. b. An investment paying interest of 11.7 percent compounded semiannually. 11. Fill in the blanks in the following table: Nominal Interest Rate(%) Inflation Rate(%) Real Interest Rate (%) 10 12 12. Harold Filbert is 30 years of age and his salary next year will be $20,000. Harold forecasts that his salary will increase at steady rate of 5 percent per annum until his retirement at age 60. a. If the interest rate is 8percent, what is the PV of his last salary payment? 13. Siegefried Basset is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year until his death. If the interest rate is 8 percent, what income can Mr. Basset to receive each year? 14. A leasing contract calls for an immediate payment of $100,000 and nine subsequent $100,000 semiannual payments at six month intervals. What is the PV of these payments if the annual discount rate is 8 percent