QUIZ 2

# QUIZ 2 - Question 1 2 out of 2 points Suppose you wish to...

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Question 1 2 out of 2 points Suppose you wish to create a scholarship fund which will pay 66.85 each year for the next 14 years. If you accomplish your task by depositing a single amount today into a bank account which pays 13.14% per year, what must the deposit amount be? (Accuracy is at the second decimal.) Answer Selected Answer: 418.41 Correct Answer: 418.41 ± 0.05 Response Feedback: The answer is P = A (P/A,i,n). Question 2 0 out of 2 points Exactly 17 years ago, Jerry bought a government bond which pays the same amount each year forever, starting exactly one year from the day of purchase. The maximum amount Jerry was willing to pay for the bond back then was 841.1 dollars. An identical bond is offered by the government today. What is the maximum Jerry would be willing to pay for this bond today given he always uses a yearly interest of 15.38% in his calculations? (Accuracy is set at the third decimal.) Answer

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Response Feedback: The present value of the bond is the maximum amount Jerry is willing to pay. Suppose Jerry was willing to pay a maximum of Z dollars m year ago, i.e. in year "-m". Back then, year "-m" was the present and so it must be that Jerry calculated Z=A/i. Now m years have passed, so the present is "year 0" (today). But the present value calculation will be the same, A/i, and given

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Question 3 0 out of 2 points Suppose you have been investing the same amount of 287.34 dollars each year in a bank account that pays 21.56% per year in interest. Your first deposit was at the end of year 20 and the last deposit will be in year 48. How much will you have in the bank account at the end of year 48? (Accuracy is set at the second decimal for this question.) Answer Selected Answer: 314085.41 Correct Answer: 382,089.57 ± 0.5
Response Feedback: There are several ways to do this. The simplest one is to use the future value factor F= A (F/A,i,z- m+1), where A is the deposit amount. Where doe s the "n=z- m+1" come from? The last deposit is in period z and the first in period m. Therefore there is a total of z- m+1 deposits. We use this as the "n" in the F/A factor which naturally takes us to the end of the period of the last payment. Another

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Question 4 2 out of 2 points In the "Student Loan Example" discussed in class (and which is available in "Excel files"), suppose the student borrows 233 dollars today and pays back the loan using Plan A. What will be the amount still owed at the end of year 8 after the payment in that year is made (i.e., find the "balance owed"), if the annual interest rate is 9%? (Accuracy is set at the second decimal.) Answer Selected Answer: 63.87 Correct Answer: 63.87 ± 0.05 Response Feedback: The balance owed in period t is given by Bt=P(F/P,i,t) - A(F/A, i, t) where A is the amount paid every year under plan A, that is, A =P(A/ P,i, 10). Question 5
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## This note was uploaded on 09/24/2011 for the course ECN 801 taught by Professor Bardis during the Winter '11 term at Ryerson.

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QUIZ 2 - Question 1 2 out of 2 points Suppose you wish to...

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