HW 2 - (given) Answers - ACE 245 Exercise 2: Financial Math...

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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
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8. What are the FICA rates for self-employed individuals and the standard federal income tax deduction for a single-head of household filer for 2006? FICA self employed rate = 12.4% Soc Sec. + 2.9% Medicare = 15.3% $7,550 [See 2006 Standard Deduction Table] 9. [2 points] Snow Bank is offering 3-year certificates of deposit paying interest of 6%/yr compounded annually. The rate of inflation is 2.5%/yr. If inflation continues at that rate, what would be the real value of $10,000 placed in a CD at the end of 3 years? FV[(3.4146%),3,0,-10000,0] = $11,060 (Note:
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This note was uploaded on 01/28/2009 for the course ACE 245 taught by Professor Braden during the Fall '07 term at University of Illinois at Urbana–Champaign.

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HW 2 - (given) Answers - ACE 245 Exercise 2: Financial Math...

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