Handout Problems for
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1.
Your Father is about to Jeiire . .us finn has given him the option of $20,000 or an annuity of
$3,000 for ten years. Which is worth more, if an interest rate of 6% is utilized for the annuity?
Do not consider taxes and other factors.
2.
Your aunt is 69 years old. She has savings of $28,000. She had made arrangements to enter a
home for the aged on reaching the age of 80. Your aunt wants to decrease her savings by a
constant amount each year for ten years with a zero balance remaining. How much can she
withdraw each year if she earns 6% annuity on her savings? Her first withdrawal would be a
year from now?
3.
The Beneficent Loan Company has agreed to lend you funds to complete your last year MBA.
The company will give you $15,000 today if you agree to repay the loan four years from now
with a lump sum interest payment of $2,118 together with the principal. What annual rate of
interest is Beneficent charging?
4.
Mr. Right would like to buy a house at the end of ten years. How much money does he have to
save now in order to buy the house if he just puts a lump sum into the bank now at 10% interest?
How much is it ifhe puts a certain fixed amount at the beginning of every year, at 10% interest.
The house will be worth $.,60,000 at the end ofyear 10.
5.
Mary is planning to retire in 25 years. Thus far, she has accumulated $15,000 in a bank account,
earning 5% interest. When she retires, she would like to withdraw $24,000 from the account at
the end of the following 15 years. After the last withdrawal, her bank account balance will be
zero. How much must Mary deposit (25 deposits) for the next 25 years, first deposit start today
to be able to do this? Assume the account will continue to earn 8%.
6.
What is the 'EAR' for a quoted rate of 9% compounded quarterly? At this rate, how much will
you have accumulated in 5 years with a principal of$500? What ifcompounding is continuous?
7.
Stephen and Company wants to borrow $100,000 from the Royal Bank at an annual interest rate
of 12%. The loan is to be repaid in 4 equal annual installments with the first payment made a
year from now. If Stephen has a taxable rate of 40% and a cost ofcapital of 15%, what is the net
cost ofthe loan to the company?
8.
You want to have $1,000,000 to use for retirement in 35 years. If you can earn 1% per month,
how much do you need to deposit on a monthly basis ifthe first payment is made in one month?
What ifthe first payment is made today?
9.
You want to receive $5,000 per month for the next 5 years. How much would you need to
deposit today ifyou can eam 0.75% per month.
Suppose you have $200,000 to deposit and can earn 0.75% per month:
a.) for how many months could you receive $5,000 payment?
b.) how much could you receive every month for 5 years?