1015 WordsJul 1, 20135 Pages

QUESTIONS
1. Assume that you are given a set of cash flows on a time line and asked to find their present value. How would you choose the discount rate to apply to these cash flows?
abcdefg
2. Consider a one-year, $18,000 CD.
a. What is its value at maturity if it pays 8.4 percent (annual) interest?
b. Compute the future value if the CD pays 3.2 percent; if it pays 16.8 percent. Overall, what do these results indicate about the relation between level of interest and future value? c. The First National Bank of San Francisco offers CDs with an 8.4 percent nominal (stated) interest rate but compounded semiannually. What is the effective annual rate on such a
CD? What is the value of the CD at the end of the year? Explain*…show more content…*

What are the effective annual rates and values at maturity of these CDs? (Use a 365-day year.)
4. It is estimated that in six years the total cost for one year of college will be $35,000.
a. How much must be invested today in a CD paying 8.4 percent annual interest in order to accumulate the needed funds?
b. If only $18,000 is invested, what annual interest rate is needed to produce the needed
$35,000 after six years?
c. If only $18,000 is invested, what stated rate must the First National Bank offer on its semiannual compounding CD to accumulate the required funds? Explain how the analysis changes if the funds were invested with Pacific Trust or Bay State Savings and Loan.
5. Now consider the second alternative—six annual payments of $3,000 each made at the end of each year.
a. What type of annuity is this?
b. What is the future value of this annuity if the payments are invested in an account paying
8.4 percent interest annually?
c. What is the future value if the payments are invested with the First National Bank, which offers semiannual compounding? How does the analysis change with quarterly or daily compounding? d. What size payment would be needed to accumulate $35,000 under annual compounding at an 8.4 percent interest rate?
e. What lump sum, if deposited today, would produce the same ending value as in Part b?
f. Suppose the payments are only $1,500 each, but are made every six months, starting six months from today.

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