1. You believe that the average annual interest rate for the next three years is 5%, what is the maximum amount you would pay for a right to claim $1000 in 3 years?

2. How would your answer change if the expected annual interest rates for the next three years are 4%, 5% and 6%, respectively? Please provide your maximum price.

3. As a winner of a breakfast cereal competition, you can choose one of the following prizes:

1) $100,000 now

2) $11,400 a year forever

3) $19,000 for each year for the next ten years.

a. If the interest rate is 12%, which is the most valuable prize?

b. Would your answer change if the interest rate is 8%?

4. Suppose you have $20,000 in a bank account earning 0.5% interest per month. You need $30,000 to make a down payment on a house you want to purchase. You can save an additional $100 per month. How long will it take to accumulate the $30,000?

5. You invest $1,000 today and expect to sell your investment for $2,000 in 10 years.

a. Is this a good deal if the market rate of return for a comparable investment is 6%?

b. What if the rate of return is 10%?

6. A couple puts aside $3,000 each year in a savings plan that earns 8% per year. In 5 years they will receive a gift of $10,000 that also can be invested. If they follow through the plan, how much will they have accumulated 30 years from now?