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Unformatted text preview: 1. If the interest is compounded quarterly with 8% APR, which of the following statements is CORRECT? a. The periodic rate of interest is 2% and the effective rate of interest is 4%. 4 b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%. g c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%. l d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. g e. The periodic rate of interest is 8% and the effective rate of interest is also 8%. a Answer: d 2. What is the coefficient of variation for security a? W Probabili ty t Ra(State= ?) ? Rb(State= ?) ? Boom B 35% 3 0.30 0.06 Average A 40% 4 0.10 0.06 Recessi on o 25% 20.150.05 1. 1.00 2. 1.25 3. 1.36 4. 1.73 5. 1.90 1 Answer: d 3. You plan to save $6,400 per year, beginning immediately . You will make 4 deposits in an account that pays 5.7% interest. How much will you have 4 years from today? a. $22,980.31 $ b. $22,685.69 $ c. $26,221.12 $ d. $29,461.93 $ e. $31,524.26 Answer: d A BEGIN Mode B N 4 Alternative setup: A I/YR 5.7% 1 2 3 4 PV $0.00 $6,400 $6,400 $6,400 $6,400 PMT $6,400 NFV = $29,461.93 N FV $29,461.93 4. Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero. a. Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). y b. Investment B pays $125 at the end of every 6month period for the next 10 years (a total of 20 payments). n c. Investment C pays $125 at the beginning of every 6month period for the next 10 years (a total of 20 payments). d. Investment D pays $2,500 at the end of 10 years (just one payment). e. Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments). Answer: a A A dominates B because it provides the same total amount, but it comes faster, hence it can earn more interest over the 10 years. A also dominates C and E for the same reason, and it dominates D because with D no interest whatever is earned. We could also do these calculations to answer the question: FV Interest # PMT Each PMT E A $4,382.79 Largest EFF% 10.00% 10 250 B $4,081.59 NOM% 9.76% 125 C $4,280.81 125 D $2,500.00 2500 E $3,984.36 250 5. Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?...
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 Spring '08
 NAO
 Interest

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