Question #3 (Time Value of Money - annuity)
Assume that it is now June 1, 2010 and you will need $10,000 on June 1, 2014.
Bank1 compounds interest at a rate of 8 percent annually.
(a)How much must you deposit on June 1, 2011 to have a balance of $10,000 on
June 1, 2014?
(b)If you want to make equal payments on each June 1 from 2011 through 2014
to reach your goal of $10,000, how much must each of the payments be?
(c)If your father were to offer either to make the payments calculated in part (b)
or to give you a lump sum of $7,500 on June 1, 2011, which would you choose?
Why?
(d)If you have only $7,500 on June 1, 2011, what interest rate, compounded
annually, would you have to earn to have the necessary $10,000 on June 1,
2014?
(e)Suppose you can deposit only $1,862.90 each June 1 from 2011 through
2014, but you still need $10,000 on June 1, 2014. What interest rate, with annual
compounding, must you earn to achieve your goal?
(f)To help you reach your $10,000 goal, your mother offers to give you $4,000 on
June 1, 2011. You will find part-time work and make 6 additional payments of
equal amounts each 6 months thereafter. If all this money is deposited with your
favourite bank which pays 8 percent, compounded semi-annually, how large
must each of the 6 payments be?