FIN 501, HW3
(Please record your answers on Scantron Form 882, due on Sep.15)
Time Value of Money
1.
You win the lottery and are given the option of receiving $250,000 now or an annuity of $25,000
at the end of each year for 30 years. Which of the following is correct? (Ignore taxes)
A)
These two options are always identical.
B)
You will always choose the lump regardless of interest rates.
C)
You will choose the annuity payment if the interest rate is 7%.
D)
You will always choose the annuity.
E)
Comparing the future value of the two alternatives will lead to a different decision
than
you will reach from a comparison of the present values.
2.
Which of the following statements is correct?
A)
Other things held constant, the present value of an amount to be received in the future
would be greater if the discount rate were to be increased.
B)
Other things being equal, a 4-year $400 annuity due will have a larger present value than
a 4-year $400 deferred (ordinary) annuity.
C)
Other things being equal, the future value of $1,000 would be greater if interest were to
be compounded annually, rather than semi-annually.
D)
If the interest rate on an investment that pays cash flows in the future is greater than zero,
then the present value of this investment would be larger than its future value.
3.
You have $500 that you would like to invest. You have 2 choices: Savings account A which earns
8% compounded annually, or savings account B which earns 7.75% compounded semiannually.
Which would you choose and why?
A)
A because it has a higher effective annual rate.
B)
A because the future value in one year is lower.
C)
B because it has a higher effective annual rate.
D)
B because the future value in one year is lower.
E)
B because it has the higher quoted rate.
4.
You are going to withdraw $1,000 at the end of each year for the next three years from an account
that pays interest at a rate of 8% compounded annually. How much must there be in the account
today in order for the account to reduce to a balance of zero after the last withdrawal?
A)
$
793.83
B)
$2,577.10
C)
$2,602.29
D)
$2,713.75
E)
$2,775.67
5.
If the Treasury yield curve is downward sloping, how would the yield to maturity on a 10-year
Treasury coupon bond compare to that on a 1-year T-bill?
A)

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