Week 1 Work 2 Questions 3. A saver wants $ 100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds. a) What amount must be invested each year to accumulate $ 100,000 if ( 1) the payments are made at the beginning of each year or ( 2) if they are made at the end of each year? b) How much must be invested annually if the expected yield is only 5 percent? 5. Graduating seniors may earn $ 45,000. If the annual rate of inflation is 2 percent, what must these graduates earn after 20 years to maintain their current purchasing power? If the rate of inflation rises to 4 percent, will they be maintaining their standard of living if they earn $100,000 after 20 years? 8. You are offered $ 900 five years from now or $ 150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? If you can earn 14 percent on your funds, which offer will you accept? Why are your answers different? 9. The following questions illustrate nonannual compounding. a) One hundred dollars is placed in an account that pays 12 percent. How much will be in the account after one year if interest is compounded annually, semiannually, or monthly? b) One hundred dollars is to be received after one year. What is the present value of this amount if you can earn 12 percent compounded annually, semiannually, or monthly?  |
