andytrader

Lois Weaver wants to have $1.5 million in a retirement fund when she retires in 30 years. If Weaver can earn a 9% rate of return on her investments, approximately how much money must she invest at the end of each of the next 30 years in order to reach her goal?

A) $50,000.

B) $11,005.

C) $28,725.

---

Using a financial calculator: N = 30; I/Y = 9; FV = -1,500,000; PV = 0; CPT → PMT = 11,004.52.

andytrader

Optimal Insurance is offering a deferred annuity that promises to pay 10% per annum with equal annual payments beginning at the end of 10 years and continuing for a total of 10 annual payments. For an initial investment of $100,000, what will be the amount of the annual payments?

0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19
$100,000										?	?	?	?	?	?	?	?	?	?

A) $38,375.

B) $25,937.

C) $42,212.

---

At the end of the 10-year deferral period, the value will be: $100,000 × (1 + 0.10)10 = $259,374.25. Using a financial calculator: N = 10, I = 10, PV = $100,000, PMT = 0, Compute FV = $259,374.25. Using a financial calculator and solving for a 10-year annuity due because the payments are made at the beginning of each period (you need to put your calculator in the “begin” mode), with a present value of $259,374.25, a number of payments equal to 10, an interest rate equal to ten percent, and a future value of $0.00, the resultant payment amount is $38,374.51. Alternately, the same payment amount can be determined by taking the future value after nine years of deferral ($235,794.77), and then solving for the amount of an ordinary (payments at the end of each period) annuity payment over 10 years.

andytrader

Vega research has been conducting investor polls for Third State Bank. They have found the most investors are not willing to tie up their money in a 1-year (2-year) CD unless they receive at least 1.0% (1.5%) more than they would on an ordinary savings account. If the savings account rate is 3%, and the bank wants to raise funds with 2-year CDs, the yield must be at least:

A) 4.0%, and this represents a required rate of return.

B) 4.5%, and this represents a discount rate.

C) 4.5%, and this represents a required rate of return.

---

Since we are taking the view of the minimum amount required to induce investors to lend funds to the bank, this is best described as a required rate of return. Based upon the numerical information, the rate must be 4.5% (= 3.0 + 1.5).

andytrader

Selmer Jones has just inherited some money and wants to set some of it aside for a vacation in Hawaii one year from today. His bank will pay him 5% interest on any funds he deposits. In order to determine how much of the money must be set aside and held for the trip, he should use the 5% as a:

A) required rate of return.

B) discount rate.

C) opportunity cost.

---

He needs to figure out how much the trip will cost in one year, and use the 5% as a discount rate to convert the future cost to a present value. Thus, in this context the rate is best viewed as a discount rate.

andytrader

Wei Zhang has funds on deposit with Iron Range bank. The funds are currently earning 6% interest. If he withdraws $15,000 to purchase an automobile, the 6% interest rate can be best thought of as a(n):

A) opportunity cost.

B) financing cost.

C) discount rate.

---

Since Wei will be foregoing interest on the withdrawn funds, the 6% interest can be best characterized as an opportunity cost — the return he foregoes by postponing his auto purchase until the future.