ACE 245
Exercise 2:
Financial Math & Financial Diagnostics
(Due Sept 21)
Instructions:
Select the best answers.
Each question is worth 1 point except as indicated
.
For calculation questions, show your logic.
Turn in typed answers or spreadsheets.
1.
Why does a dollar received in the future have a smaller present value than a dollar
received today (circle 1)?
a.
If the dollar is received next year, interest earnings would be foregone.
b.
Interest rates will be lower next year.
c.
Taxes disproportionately affect funds received in the future.
d.
Because of deflation
e.
All of the above.
2.
If the prevailing interest rate is 6%/yr and compounding is monthly, what is the
present value of $10,000 received 10 years from now?
PV[6%/12,120,0,10000,0] = $5,496
3.
If the prevailing interest rate is 5%/yr and compounding is annual, what is the
value of $25,000 3 years from now?
FV[5%,3,0,-25000,0] = $28,941
4.
Say your wealthy aunt promises to deposit $5,000 into an account for you each
year for 5 years starting at graduation.
If the account pays 7%/yr compounded
annually, what is the nominal value of her gift at the end of the 5th year?
FV[7%,5,-5000,0,1] = $30,766
5.
Mr. B invested $50,000 in a bond 20 years ago.
The bond promised interest of
6%/yr with compounding monthly.
How much does Mr. B’s account contain
today?
FV[6%/12,240,-50000,0,0] = $165,510
6.
Jack’s goal is to accumulate $1,500,000 in his retirement fund by the end of 25
years.
The fund currently contains $150,000.
Jack’s calculation is based on an
8% expected annual rate of return with
quarterly
compounding.
How much
should he deposit at the beginning of each quarter to achieve his goal?
PMT[8%/4,100,-150000,1500000,1] =
$1,298
7.
For a single taxpayer in the 25 percent marginal tax bracket, how much more or
less in taxes is owed with a $2000 tax credit versus a $2000 tax deduction?
Credit – taxes reduced by $2000
Deduction – taxes reduced by 25% * $2000 = $500
Credit results in savings of $1500.
1