Week 7 - Quiz Answers

Week 7 - Quiz Answers - BUSN 5200 Week 7 Quiz(Answers...

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BUSN 5200 – Week 7 Quiz (Answers) 1. (Monthly compounding) How much would you have to invest today at 12% annual interest, compounded monthly, in order to end up with $1,000 in your investment account at the end of 12 months? a) $887.45 Annual interest rate = 12% b) $892.86 Monthly interest rate = 12%/12 = 1% c) $256.68 PV = FV/(1+r) d) $990.10 PV = $1,000/(1+0.01) ¹² PV = $1,000/1.126825 PV = $887.45 2.(Annualizing a rate) The effective annual rate (EAR) of 1% interest per month is: a) 12%EAR = (1+r)- 1b) 12.68%EAR = (1+0.01)¹² - 1c) 1%EAR = 0.126825 or 12.68%d) Not enough information to determine 3.(Annualizing a rate) Your bank advertises 12 month CDs with a stated annual interest rate of 12%, compounded monthly. What is the effective annual rate (EAR) on the CD? 4..(PV of annuity due) You are in charge of a new Missouri State Lottery. The lottery rules say that winners are to be paid $10 million in the formof 10 annual payments of $1 million each. Assuming that the interest rate is 10% and the payments are to be made at the beginning of eachof the next 10 years, how much money does your lottery organization have to deposit in an account today in order to make the required payments to a lottery winner?
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