You want to buy a new sports car 3 years from now, and you plan to save $6,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?
able[[a.
able[[$19,779.8
Instructions: Please answer all the questions and where calculations are necessary please show the work to get partial credit. The use of the financial calculator would make your work easier
1. Which of the following statements is CORRECT? a. A time line is not meaningful unless all cash flows occur annually.
b.Time lines are useful for visualizing complex problems prior to doing actual calculations. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. d. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
2. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? a.The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000. b. The discount rate increases.
[The riskiness of the investment's cash flows decreases.
.The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. .The discount rate decreases.
3.Which of the following statements is CORRECT? a. 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
.fThe 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. 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 yariable annuity.
4. Which of the following statements regarding a 15-year (180 month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.) a. The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years. b.[Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant. Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant. d.The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year The outstanding balance declines at a slower rate in the later years of the loan's life.
5. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant? a. The present value of a 5-year, S250 annuity due will be lower than the PV of a similar ordinary annuity. b.A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate, d.JIf an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.
