Fin 534 Quiz 3

1. If you are borrowing money and paying interest, would you prefer an interest rate that compounds annually, quarterly, or daily? Why? (2-4 sentences. 1.0 points)

16. If the nominal interest rate on an account is 1% and the inflation rate is 2%, the real interest rate is:

What annual interest rate is needed to produce $200,000 after five years if only $100,000 is invested?

Now if the payment periods remain the same, while the interest is compounded quarterly, once again, the payment periods do not correspond to the compounding periods. An adjusted periodic rate for semiannual payment (Is) must be calculated first according to the quarterly periodic rate (Iq). This time, the equation should be:

Therefore the annual interest rate is 8% and the effective annual rate compounded quarterly is 8.24%

A person deposited $500 in a savings account that pays 5% annual interest that is compounded yearly. At the end of 10 years, how much money will be in the savings account? (Bluman, A. G. 2005, page 230).

(a) According to this new plan, the investment is divided into six equal installment paid annually. As the equal payments are made at each period, this type of investment is regarded as an Ordinary Annuity.

Like the HP above, you pay a store and have regularly scheduled installments over a term. In any case, the regularly scheduled installments are lower and/or the term is shorter (generally a maximum. of 48 months), since you are not paying off the entire auto. Toward the end of the term, there is still a huge lump of the fund unpaid. This is normally called a GMFV (Guaranteed Minimum Future Value). The auto fund organization ensures that, inside certain conditions, the auto will be worth at any rate as much as the remaining money owed. This gives you three

1. Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5% and your life expectancy is 18 years. What is the hypothetical constant benefit payment?

We then get the annuity of the 1,200 semiannual PMTs at year 6, and then at Present Value

There are two types of interest rates the Nominal Interest Rate and The Real Interest Rate, the nominal interest rate is the rate that we see in daily lending, it is the amount, in percentage terms of the interest payable example: Dhruv deposits 100$ in his commonwealth bank account for one year and then receives interest of $10, at the end of the year Dhruv’s balance is $110. In this case, the nominal interest rate is 10% per annum

7.The mortagage interest rate is 9% per year(The mortgage was taken out on august 1.)

Annuity immediate, also known as ordinary annuity or annuity in arrears, is the most common annuity form in the territories. It is an annuity with payments of one unit each, made at the end of each year for n years with the rate of interest per period is i. The present value of annuity (a_n) is the sum of each payments’ present values. Its equation is given by a_n=〖1-(1+i)〗^(-n)/i. Future value of the annuity (s_n) refers to the accumulated value of the annuity at time n. Its equation is given by s_n=(〖(1+i)〗^n-1)/i. Another well-known form of annuity is annuity-due. It is an annuity in which the payment is paid at the beginning of the payment periods. Perpetuity is an annuity with no termination date with numerous of payments, such as dividends of stocks. Deferred annuity is an annuity which payments can start after a period of time. It is suitable for some clients who want to stop to pay for a short time interval due to his or her financial problems. Some more examples of annuities are fixed annuities, variable annuities and equity-indexed annuities

term of the bonds, the borrowing rate in each period should be the same. The effective-interest

     An ordinary annuity is a series of regular payments where each payment is made at the end of the payment period. The payment period is the length of time between payments. Payments are usually made annually, semiannually, quarterly,