FF Qs & As Topic 2 Part 1 - Feedback Forum...

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Unformatted text preview: Feedback Forum Questions Topic 2 Financial Maths Part 1 Question 1 An annuity in which the first cash flow occurs immediately is called an: a) perpetuity b) annuity due c) deferred annuity d) none of the above An annuity due is an annuity whereby the payments are made or received at the beginning of the annuity period. 1 Question 2 After two years a $10,000 investment earning 8% p.a. compounded six monthly will accumulate to a) $11,600 b) $11,664 c) $11,699 d) $12,597 Use FV of a single sum formula: FV = PV(1 + r) n FV = $10,000 (1 + 0.04) 4 FV = $10,000 (1.1698) FV = $11,698.58 2 Question 3 A finance company offers a choice of investments using either simple interest or compound interest, both at a rate of 10% per annum. If an investor wants to invest $20,000 for 10 years, what is the difference in future values of the investment under compounding compared with simple interest. a) $4,440 b) $3,220 c) $4,210 d) $11,874 i) Simple Interest interest is calculated on the original investment only - use the formula: FV = PV(1 + (r n)) FV = $20,000(1 + (0.10 x 10) FV = $20,000 (1 + 1) FV = $20,000 (2) FV = $40,000 ii) Compound interest interest is calculated on the original principal plus any interest already earned use the formula: FV = PV(1 + r) n FV = $20,000 (1 + 0.10) 10 FV = $20,000 (2.5937) 3 FV = $51,874.85 Therefore, $51,874.85 - $40,000 = $11,874.85 4 Question 4...
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This note was uploaded on 04/24/2011 for the course BAFI 1012 taught by Professor Michaelgangemi during the Three '10 term at Royal Melbourne Institute of Technology.

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FF Qs & As Topic 2 Part 1 - Feedback Forum...

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