Question

• Each question will be labeled as a calculator or formula question.
• For calculator problems , you are to label and input all the variables of interest: N, I/Y, PV, PMT, FV (and Begin mode if you switch). the unknown variable should be indicated by a ? symbol. Once solved, rewrite the variable identifier with the correct answer.
• For the formula problems, set up the problem and solve. Be sure to show each step for credit.
• Answer each question in BB in the space provided. Do NOT upload answers into BB.
• Round all $ problems to the nearest dollar.
• All rate problems must be carried at least 4 decimal places and left in % form.
• Work must be shown and all answers must be legible to receive credit. Partial credit is awarded.

2. Calculator problem:

Suppose you begin saving for your retirement on your 23^rd birthday by putting $2,000 into an account earning 5.00% per year which is compounded quarterly. You put the same amount in the account on your birthday for each of the next 40 years. How much will you have available when you retire in 45 years?

3. Calculator problem:

You just inherited some money, and a broker offers to sell you an annuity that pays $27,500 at the end of each year for 25 years. You could earn 6.25% on your money in other investments with equal risk. What is the most you should pay for the annuity?

Answer 1

2.Information provided:

Annual deposit= $2,000

Time= 40 years*4= 160 quarters

Quarterly interest rate= 5%/4= 1.25%

The question is solved by calculating the future value.

Enter the below in a financial calculator to compute the future value of ordinary annuity:

PMT= -2,000

N= 160

I/Y= 1.25

Press the CPT key and FV to compute the future value.

The value obtained is 1,007,683.34.

Therefore, the amount in the account on the day I retire in 40 years will be is $1,007,683.34.

2. Information provided:

Annuity= $27,500

Time= 25 years

Yield to maturity= 6.25%

The question is calculated by computing the present value.

Enter the below in a financial calculator to compute the present value:

PMT= 27,500

I/Y= 6.25

N= 25

Press the CPT key and PV to compute the present value.

The value obtained is 343,343.91.

Therefore, I should pay $343,343.91 for the annuity.