QUESTIONS 19 TO 22 Mary bought a five-year $20,000 Guaranteed Income Certificate (GIC) on January 1, 2010 (for which she paid $20,000). She will receive $1,300 in interest income on December 31 from 2010 to 2014 The GIC will mature on December 31, 2014 at which time Mary will receive, in addition to her last interest payment of $1,300, the $20,000 that she invested on January 1, 2010. During this period, annual inflation is expected to be 5 percent. 19. What is Mary's precise nominal (with inflation) rate of interest on the GIC? a) Solve for i* from 20,000 = 1,300(PIA,1*,5) b) 100(1,300/20,000) c) 5.00% d) 6.5% 20. What is Mary's precise real (inflation-free) rate of interest on the GIC? a) (1+nominal rate)(1+inflation rate) - 1 b) Nominal rate inflation rate c) {(1 +nominal rate) + (1+inflation rate) - 1 d) Inflation rate (=5.00%) e) None of these answers 21. If the annual interest income Mary receives from the GIC can be reinvested at the nominal rate in question 18 during the 5-year life of the GIC, what will be the value of her $20,000 investment and interest income on December 31, 2014 in current (nominal) dollars? a) $20,000(P/F,nominal rate,5) b) $20,000(F/P,nominal rate,5) c) $1,300(FIA, nominal rate,55 d) $20,000+5(1,300) e) None of the above answers. 22. What is the inflation-free dollar value of the interest income Mary receives at the end of the 4th year (i.e., on December 31, 2013)? a) $1,300(P/F,5%,3) b) $1,300(P/F,5%,4) c) $1,300(F/P,5%,4) d) $1,300(FIA,5%,4) e) None of these answers. Answers are below. Please show the steps to obtaining them thanks! 19) D 20) C 21) B 22) B QUESTIONS 19 TO 22 Mary bought a five-year $20,000 Guaranteed Income Certificate (GIC) on January 1, 2010 (for which she paid $20,000). She will receive $1,300 in interest income on December 31 from 2010 to 2014 The GIC will mature on December 31, 2014 at which time Mary will receive, in addition to her last interest payment of $1,300, the $20,000 that she invested on January 1, 2010. During this period, annual inflation is expected to be 5 percent. 19. What is Mary's precise nominal (with inflation) rate of interest on the GIC? a) Solve for i* from 20,000 = 1,300(PIA,1*,5) b) 100(1,300/20,000) c) 5.00% d) 6.5% 20. What is Mary's precise real (inflation-free) rate of interest on the GIC? a) (1+nominal rate)(1+inflation rate) - 1 b) Nominal rate inflation rate c) {(1 +nominal rate) + (1+inflation rate) - 1 d) Inflation rate (=5.00%) e) None of these answers 21. If the annual interest income Mary receives from the GIC can be reinvested at the nominal rate in question 18 during the 5-year life of the GIC, what will be the value of her $20,000 investment and interest income on December 31, 2014 in current (nominal) dollars? a) $20,000(P/F,nominal rate,5) b) $20,000(F/P,nominal rate,5) c) $1,300(FIA, nominal rate,55 d) $20,000+5(1,300) e) None of the above answers. 22. What is the inflation-free dollar value of the interest income Mary receives at the end of the 4th year (i.e., on December 31, 2013)? a) $1,300(P/F,5%,3) b) $1,300(P/F,5%,4) c) $1,300(F/P,5%,4) d) $1,300(FIA,5%,4) e) None of these answers. Answers are below. Please show the steps to obtaining them thanks! 19) D 20) C 21) B 22) B
