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Financial Markets and Institutions: Assignment-4

The document contains a financial markets assignment with 10 multiple choice questions. It provides the questions, working calculations for some questions, and the final multiple choice answers. The questions cover topics like types of annuities, future and present value calculations, rates of return, and savings/investment scenarios.

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divesh
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97 views4 pages

Financial Markets and Institutions: Assignment-4

The document contains a financial markets assignment with 10 multiple choice questions. It provides the questions, working calculations for some questions, and the final multiple choice answers. The questions cover topics like types of annuities, future and present value calculations, rates of return, and savings/investment scenarios.

Uploaded by

divesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Divesh

PGP/24/387

Financial Markets and Institutions


Assignment-4

Questions -2, 12, 22, 32, 42, 52, 62, 72, 82 and 92

1. Annuities where the payments occur at the end of each time period are called _____, whereas
_____ refer to annuity streams with payments occurring at the beginning of each time period.
a) ordinary annuities; early annuities
b) late annuities; straight annuities
c) straight annuities; late annuities
d) annuities due; ordinary annuities
e) ordinary annuities; annuities due

2. You would be making a wise decision if you chose to:


a) base decisions regarding investments on effective rates and base decisions regarding loans on
annual percentage rates.
b) assume all loans and investments are based on simple interest.
c) accept the loan with the lower effective annual rate rather than the loan with the lower
annual percentage rate.
d) invest in an account paying 6 percent, compounded quarterly, rather than an account paying 6
percent, compounded monthly.
e) ignore the effective rates and concentrate on the annual percentage rates for all transactions.

3. You are the beneficiary of a life insurance policy. The insurance company offers two options
for receiving the proceeds: a lump sum of $50,000 today or payments of $550 a month for ten
years. If you can earn 6 percent, compounded monthly, which option should you take and
why?
a) You should accept the lump sum because the payments are only worth $49,540.40 today.
b) You should accept the payments because they are worth $51,523.74 today.
c) You should accept the payments because they are worth $53,737.08 today.
d) You should accept the $50,000 because the payments are only worth $49,757.69 today.
e) You should accept the $50,000 because the payments are only worth $48,808.17 today.

PV of annuity = C * {1 – 1 / (1 + r) ^ t } / r

= 550 * {1 – 1 / (1 + 0.06/12) ^ 120} / (0.06/ 12)

= 49,540.40

Hence , he should accept the lumpsum payment of $50,000

4. What is the future value of $3,100 a year for six years at interest rate of 8.9 percent?
a) $20,255.40
b) $26,847.26
c) $27,134.16
Divesh
PGP/24/387

d) $23,263.57
e) $24,414.67

FV = C * { (1 + r ) ^ n – 1}/ r

= 3100 * { (1+0.089) ^ 6 -1} / 0.089

= 23,263

5. You want to purchase an annuity that will pay you $1,200 a quarter for 15 years and earn a
return of 5.5 percent, compounded quarterly. What is the most you should pay to purchase
this annuity?
a) $52,988.16
b) $48,811.20
c) $47,455.33
d) $48,450.67
e) $52,806.30

PV of annuity = C * {1 – 1 / (1 + r) ^ t } / r

= 1200 * {1 – 1 / (1 + 0.055/4) ^ 60} / (0.055 / 4)

= 48,811.20

6. You are considering two savings options that each provide a rate of return of 4.65 percent. The
first option requires annual savings of $2,000, $2,500, and $3,000 over the next three years,
respectively, with the first deposit due one year from today. The other option is to save one
lump sum amount today. If you want to have the same balance in your savings at the end of
the three years, regardless of the savings method you select, how much do you need to save
today if you select the lump sum option?
a) $6,811.50
b) $6,791.42
c) $7,128.23
d) $6,607.23
e) $7,500.00

PV1= 2000; t=2

PV2= 2500; t=1

PV3=3000; t=0

r=.0465

First, we will calculate the future value for each deposit at the end of 3 years

FV = PV * (1 + r) ^ t

FV1 =2000 * (1+0.0465) ^2 = 2190.32

FV2 =2500 * (1+0.0465) ^1 = 2616.25


Divesh
PGP/24/387

FV3=3000

Total savings = 7806.57

The lumpsum amount that he has to invest today will the present value of the total savings

PV= FV/(1+r) ^ t

= 7806.57 / (1+.0465) ^ 3

= $6811.50

7. Suzette is receiving $10,000 today, $15,000 one year from today, and $25,000 four years from
today. She will immediately invest these funds for retirement. If she earns 9.6 percent on her
investments, how much will she have in savings 30 years from today?
a) $586,124.93
b) $591,414.14
c) $646,072.91
d) $620,008.77
e) $641,547.39

FV = PV * (1 + r) ^ t

PV1 = 10,000; t = 30

PV2 =15,000; t=29

PV3 = 25,000; t=26

Using the formula, we get

FV1 = 10000 * (1 + 0.096) ^ 30 = 156428.8

FV2 = 15000 * (1 + 0.096) ^ 29 = 214090.5

FV3 = 25000 * (1 + 0.096) ^ 26 = 271028.2

Total savings = FV1 + FV2 + FV3 = $641,547.39

8. What is the annual percentage rate on a loan that charges interest of 1.65 percent per
quarter?
a) 6.50%
b) 6.45%
c) 6.54%
d) 6.60%
e) 6.72%

Annual percentage rate = 1.65 * 4

= 6.6%

9. What is the future value of investing $5,650 for 14 years at a continuously compounded rate of
8.6 percent?
a) $17,933.54
b) $16,685.44
Divesh
PGP/24/387

c) $19,369.83
d) $18,833.85
e) $13,183.85

FV = PV * e ^ (r * t)

= 5650 * e ^ (14 * 0.086)

= $18,833

10. Jeanette expects to live 30 years after she retires. At the end of the first year of her
retirement, she wants to withdraw $35,000 from her savings. Each year thereafter, she wants
to increase her annual withdrawal by 3.5 percent. If she can earn 5.5 percent on her savings,
how much does she need to have in retirement savings on the day she retires?
a) $862,001.34
b) $648,909.18
c) $764,458.87
d) $919,028.56
e) $832,004.01

PV of a growing annuity = (C / r-g) * {1-((1+g) ^t/(1+r) ^t)}

= (35000/(0.055 – 0.035)) * {1-((1 + 0.035)^30 / (1+0.055) ^ 30)}

= $764,458.87

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