Exercise 2:
Financial Math, Financial Diagnostics, & Taxes
Instructions: Each question is worth 1 point except as indicated. For calculation
questions, show your logic.
Turn in typed answers or spreadsheets.
1.
If you put $30,000 into a CD paying 5%/yr compounded annually, what would
the account value be in 5 years?
FV[5%,5,0,-30000] = $38,288.45
2.
If your Grandma promises $10,000 in 10 years, and the prevailing interest rate is
6%/yr compounded monthly, what is the present value of her promised gift?
PV[6%/12,10*12,0,-10000,0] = $5,496.33
3.
Bob Dylan wanted a backup plan if his music career faltered, so he invested
$50,000 in a bond 30 years ago. The bond promised interest of 3%/yr with
compounding monthly. How much does Bob’s account contain today?
FV[3%/12,30*12,0,-50000,0] = $122,842.11
4.
[2 points] Piggy Bank is offering 3-year certificates of deposit paying interest of
5%/yr compounded annually. The rate of inflation is 2.1%/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[2.84%,3,0,-10000,0] = $10,876.43
(Note:
1.05/1.021=
1.0284)
5.
Say your wealthy Grandpa promises to deposit $10,000 into an account for you
each year for 5 years starting at graduation. If the account pays 4%/yr
compounded annually, what is the nominal value of his gift at the end of the 5th
year?
FV[4%,5,-10000,0,1] = $56,329.75
6.
J.D.’s goal is to accumulate $2,500,000 in his retirement fund by the end of 20
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%/4,20*4,-150000,2500000,1] = $8,948.68
7.
[2 points]
Mary figures she can afford to save $275 monthly toward a down
payment for a home. She would like to accumulate at least $25,000 by the end of
5 years. Assuming her savings are deposited at the beginning of each month, what
monthly
rate of interest will she need to earn to achieve her goal? Is this a
plausible plan?
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