FMI

3.
A flow of unending and equal payments that occur at regular intervals of time is called a(n):
A. annuity due. B. indemnity. C. perpetuity D. amortized cash flow stream. E. amortization table
Solution
A bond or security without any fixed maturity date is perpetuity
13. The highest effective annual rate that can be derived from an annual percentage rate of 9% is
computed as:
A. [1 + (.09 / 365)] × 365. B. e^09 ×q. C. e × (1 + .09). D. e^09 −1. E. [1 + (.09 / 365)]^365 −1
Solution
Effective rate of interest would give highest return.
23. Your employer contributes $50 a week to your retirement plan. Assume you work for your
employer for another twenty years and the applicable discount rate is 5 percent, compounded
weekly. Given these assumptions, what is this employee benefit worth to you today?
A. $29,144.43 B. $35,920.55 C. $32,861.08 D. $26,446.34 E. $36,519.02
Solution:
Weekly contribution ,p = $50
rate of interest, R = 5% , Weekly rate of interest,r = R / 52 = 0.0961539 %
Time period, T = 20 years
Present value now = p * (1/r – 1/r*(1+r)^t)
= $32,861
33. Janet saves $3,000 a year at an interest rate of 4.2 percent. What will her savings be worth at
the end of 35 years?
A. $229,317.82 B. $230,702.57 C. $230,040.06 D. $234,868.92 E. $236,063.66
Solution:
Annual investment , p = 3,000
Interest, r = 4.2%
Time period, t = 35 years
Present value at beginning = p * (1/r – 1/r(1+r)^t)
= 54,504.62
Future value at end of 35 years = 54,504.62 * (1+r)^t
= $ 230,040
43. A car dealer is willing to lease you a car for $319 a month for 60 months. Payments are due on
the first day of each month starting with the day you sign the lease contract. If your cost of money
is 4.9 percent, compounded monthly, what is the current value of the lease?
A. $17,882.75 B. $17,906.14 C. $17,014.34 D. $16,235.42 E. $16,689.54
Solution:
Weekly contribution ,p = $319
rate of interest, R = 4.9% , Weekly rate of interest,r = R / 12 = 0.408333%
Time period, T = 59 months
We will calculate annuity for 59 months and add it to payment done today.
Present value now = p * (1/r – 1/r*(1+r)^t) + 319
= $17,014.34
53. You are considering two insurance settlement offers. The first offer includes annual payments
of $36,000, $42,000, and $50,000 over the next three years, respectively, with the first payment
being made one year from today. The other offer is the payment of one lump sum amount today.
The relevant discount rate is 7 percent. What is the minimum amount you should accept today if
you are to select the lump sum offer?
A. $119,877.67 B. $111,144.18 C. $105,000.10 D. $118,924.27 E. $114,556.88
Solution
Minimum amount you should expect to pay today under 2 nd investment should be less than present
value of 1st investment
Min Amount = 36000/(1.07^1) + 42,000/(1.07^2) + 50,000/(1.07^3)

= $111,144.18
63. BJ’s goal is to have $50,000 saved at the end of Year 5. At the end of Year 2, they can add
$7,500 to their savings but they want to deposit the remainder they need to reach their goal
today, Year 0, as a lump sum deposit. If they can earn 4.5 percent, how much must they deposit
today?
A. $31,867.74 B. $33,254.58 C. $33,108.09 D. $34,276.34 E. $34,642.28
Solution
Rate of interest = 4.5%
Worth of $ 7,500 invested at end of 2 years would be after 5 years = 7500(1+0.045)^3
= $ 8,584
Let amount invested today = x
Worth at end of 2 years = x (1+0.045)^2 = 1.092025x
Now, $7,500 is invested , Present value at end of 2 years = 1.092025x + 7500
Final worth after 5 years from beginning = $50,000
50,000 = (1.092025x + 7500) * (1+0.045)^3

Amount to be invested today, X = 33,254
73. A credit card compounds interest monthly and has an effective annual rate of 12.67 percent.
What is the annual percentage rate?
A. 12.35% B. 12.00% C. 11.99% D. 11.87% E. 11.93%
Solution
Effective rate of interest = 12.67%
No of periods in year = 12
Effective rate of interest = (1 + annual percentage rate / no of periods) ^ no of periods – 1
Annual percentage rate = 11.99%
83. Assume you could invest $25,000 at a continuously compounded rate of 10 percent. What
would your investment be worth at the end of 50 years?
A. $2,933,054 B. $3,500,824 C. $3,911,215 D. $3,710,329 E. $3,648,029
Principle Invested , p = $ 25,000

Rate, r = 10%
Time, t = 50 Years
Amount after 50 years = p*e^(r*t)
= $ 37,10,329

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3.

Min Amount = 36000/(1.07^1) + 42,000/(1.07^2) + 50,000/(1.07^3)

50,000 = (1.092025x + 7500) * (1+0.045)^3

Principle Invested , p = $ 25,000

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