1. What is an annuity? Give some examples of annuities. Distinguish between an annuity and a perpetuity.
2. (Future value) Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years. She has found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If Sarah were a finance major and learned how to earn a 14 percent annual return, how much would she have to invest today?
3. (Solving for PMT of an annuity) To pay for your child's education, you wish to have accumulated $15,000 at the end of 15 years. To do this, you plan on depositing an equal amount into the bank at the end of each year. If the bank is willing to pay 6 percent compounded annually, how much must you deposit each year to reach your goal?
4. (Solving for r of an annuity) You lend a friend $30,000, which your friend will repay in five equal annual end-of-year payments of $10,000, with the first payment to be received 1 year from now. What rate of return does your loan earn?
5. (Spreadsheet problem) If you invest $900 in a bank in which it will earn 8 percent compounded annually, how much will your investment be worth at the end of 7 years? Use a spreadsheet to do your calculations.
6. (Nonannual compounding using a calculator) Hank Schrader plans to invest $1,000 at the end of each quarter for 4 years into an account with an APR of 6.4 percent compounded quarterly. He will use this money as a down payment on a new home at the end of the 4 years. How large will his down payment be 4 years from today?
7. (Calculating the default-risk premium) At present, 10-year Treasury bonds are yielding 4% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium on the corporate bond is 0.4%, what is the corporate bond's default-risk premium?
8. (Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4% and the expected inflation rate is 7%?
9. (Interest rate determination) If the 10-year Treasury bond rate is 4.9%, the inflation premium is 2.1%, and the maturity-risk premium on 10-year Treasury bonds is 0.3%, assuming that there is no liquidity-risk premium on these bonds, what is the real risk-free interest rate?
10. (Interest rate determination) You're looking at some corporate bonds issued by Ford, and you are trying to determine what the nominal interest rate should be on them. You have determined that the real risk-free interest rate is 3.0%, and this rate is expected to continue on into the future without any change. In addition, inflation is expected to be constant over the future at a rate of 3.0%. The default-risk premium is also expected to remain constant at a rate of 1.5%, and the liquidity-risk premium is very small for Ford bonds, only about 0.02%. The maturity-risk premium is dependent on how many years the bond has to maturity. The maturity-risk premiums are as follows:

Bond Matures In: Maturity-Risk Premium:

0-1 year 0.07%

1-2 years 0.35%

2-3 years 0.70%

3-4 years 1.00%

Given this information, what should the nominal rate of interest on Ford bonds maturing in 0-1 year, 1-2 years, 2-3 years, and 3-4 years be?