FIN 534 - MIDTERM 2 (BEST SOLUTION) GUARANTTEE - 71067

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JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Answer

 

$1,781.53

 

$1,870.61

 

$1,964.14

 

$2,062.34

 

$2,165.46

 

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

Answer

 

The periodic rate of interest is 8% and the effective rate of interest is also 8%.

 

The periodic rate of interest is 2% and the effective rate of interest is 4%.

 

The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.

 

The periodic rate of interest is 4% and the effective rate of interest is less than 8%.

 

The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

 

   

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Answer

 

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

 

The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.

 

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

 

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

 

The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

 

 

 

 

 

 

 

Which of the following statements is CORRECT?

Answer

 

If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

 

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

 

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

 

The cash flows for an annuity due must all occur at the ends of the periods.

 

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

 

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Answer

 

The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

 

The periodic interest rate is greater than 3%.

 

The periodic rate is less than 3%.

 

The present value would be greater if the lump sum were discounted back for more periods.

 

The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

 

At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer

 

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

 

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

 

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

 

Investment D pays $2,500 at the end of 10 years (just one payment).

 

Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

 

  

Solution Description

 

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Answer

 

$1,781.53

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