1.
Question: The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made
until the bond matures 10 years from now, at which time it will be redeemed for
$1,000. What interest rate would you earn if you bought this bond at the offer price?
Your
Answer:
5.91%
6.71%
7.10%
5.59%
5.00%
Instructor
Explanation:
Interest rate on a simple lump sum investment
FV = PV (1 + i)
n
$1,000 = $613.81 (1 + i)
10
1.6292 = (1+i)
10
; take the 1/10
th
root of both sides:
1.6292
0.10
= 1 + i
1.0500 = 1 + i
.0500 = i or i = 5%
On a financial calculator:
N 10; PV 613.81; PMT 0; FV 1,000; I/YR ?? I/YR = 5.00%
Points
Received:
(not graded)
2.
Question:
You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning one year
from today. You will deposit the money in an account that pays 6% interest. How much will you have
just after you make the 5th deposit, 5 years from now?
Your
Answer:
$14,764.40
$13,431.83
$16,911.28
$17,843.15
$15,119.76
Instructor
Explanation:
FV of an ordinary annuity
FVA = PMT * [(1+i)
n
 1] / i
FVA = $3,000 * [(1 + .06)
5
– 1] / .06
FVA = $3,000 * [1.3382 – 1] / .06
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View Full DocumentFVA = $3,000 * .3382/.06
FVA = $3,000 * 5.6371 = $16,911.28
On a financial calculator: N 5; I/YR 6; PV 0; PMT 3,000; FV ??; FV = $16,911.28
Points
Received:
(not graded)
3.
Question:
Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000
of income per year for 20 years, beginning a year from today. The going rate on such annuities
is 6%. How much would it cost him to buy such an annuity today?
Your
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 Fall '10
 thomasrhee
 Time Value Of Money, Interest, Interest Rate, Net Present Value

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