Problem 5-6 Future value: annuity versus annuity due

What's the future value of a 5%, 5-year ordinary annuity that pays $600 each year? Round your answer to the nearest cent.

If this was an annuity due, what would its future value be? Round your answer to the nearest cent.

Problem 5-7 Present and future values of a cash flow stream

An investment will pay $100 at the end of each of the next 3 years, $250 at the end of Year 4, $400 at the end of Year 5, and $500 at the end of Year 6.

If other investments of equal risk earn 6% annually, what is its present value? Round your answer to the nearest cent.

If other investments of equal risk earn 6% annually, what is its future value? Round your answer to the nearest cent.

Problems 5-12

Effective rate of interest

Find the interest rates earned on each of the following. Round each answer to two decimal places.

You borrow $750 and promise to pay back $795 at the end of 1 year.

You lend $750 and the borrower promises to pay you $795 at the end of 1 year.

You borrow $89,000 and promise to pay back $246,805 at the end of 9 years.

You borrow $15,000 and promise to make payments of $4,058.60 at the end of each year for 5 years.

Problem 5-18 Uneven cash flow stream

a) Find the present values of the following cash flow streams at 8% compounded annually. Round your answers to the nearest cent.

0

1

2

3

4

5

Stream A	$0	$150	$350	$350	$350	$300
Stream B	$0	$300	$350	$350	$350	$150

Stream A

Stream B

b) What are the PVs of the streams at 0%, compounded annually?

Stream A

Stream B

Problem 5-19 Future value of an annuity

Your client is 26 years old; and she wants to begin saving for retirement, with the first payment to come one year from now. She can save $11,000 per year; and you advise her to invest it in the stock market, which you expect to provide an average return of 9% in the future.

a) If she follows your advice, how much money will she have at 65? Round your answer to the nearest cent.

b) How much will she have at 70? Round your answer to the nearest cent.

c) She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Round your answers to the nearest cent.

Annual withdrawals if she retires at 65

Annual withdrawals if she retires at 70

Problem 5-26 PV and loan eligibility

You have saved $5,000 for a down payment on a new car. The largest monthly payment you can afford is $450. The loan will have a 9% APR based on end-of-month payments.

a) What is the most expensive car you could afford if you finance it for 48 months? Round your answer to the nearest cent.

a) What is the most expensive car you could afford if you finance it for 60 months? Round your answer to the nearest cent.

Problem 5-30 Reaching a financial goal

Erika and Kitty, who are twins, just received $35,000 each for their 26th birthdays. They both have aspirations to become millionaires. Each plans to make a $5,000 annual contribution to her "early retirement fund" on her birthday, beginning a year from today. Erika opened an account with the Safety First Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 5% per year in the past. Kitty invested in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and whose investors have earned an average of 14% per year in the fund's relatively short history.

a) If Erika's fund earns the same returns in the future as in the past, how old will she be when she becomes a millionaire? Round your answer to two decimal places. years

b) If Kitty's fund earns the same returns in the future as in the past, how old will she be when she becomes a millionaire? Round your answer to two decimal places. years

c) How large would Erika's annual contributions have to be for her to become a millionaire at the same age as Kitty, assuming their expected returns are realized? Round your answer to the nearest cent.

d) Is it rational or irrational for Erika to invest in the bond fund rather than in stocks?

High expected returns in the market are almost always accompanied by a lot of risk. We couldn't say whether Erika is rational or irrational, just that she seems to have less tolerance for risk than Kitty does.

High expected returns in the market are almost always accompanied by less risk. We couldn't say whether Erika is rational or irrational, just that she seems to have more tolerance for risk than Kitty does.

High expected returns in the market are almost always accompanied by a lot of risk. We couldn't say whether Erika is rational or irrational, just that she seems to have more tolerance for risk than Kitty does.

High expected returns in the market are almost always accompanied by less risk. We couldn't say whether Erika is rational or irrational, just that she seems to have less tolerance for risk than Kitty does.

High expected returns in the market are almost always accompanied by a lot of risk. We couldn't say whether Erika is rational or irrational, just that she seems to have about the same tolerance for risk than Kitty does.