Question

1. A Certificate Deposit will be worth $60,000 in five years when it matures. If your required rate of return is 12%, how much you are willing to pay for this CD? Assuming compounding annually.

a. 35,584.13

b. 34,045.61

c. 33,740.97

d. 32,354.26

2. A company has just received a huge donation. It would like to make payments for its insurance for two years in advance. Previously, it has paid $91.5 in premiums every week. Assuming interest rate of 12%, what single sum of money should it pay? (Note: the insurance payments are due at the beginning of the period of coverage, and compounding weekly). This is annuity due.

a. 8,236.45

b. 8,695.11

c. 8,471.08

Answer 1

PV= FV/(1+r)^n

Where,

FV= Future Value

PV = Present Value

r = Interest rate

n= periods in number

= $60000/( 1+0.12)^5

=60000/1.76234

= $34045.61 Correct Option : b. 34,045.61

Present Value Of An Annuity Due

=C + C*[1-(1+i)^-(n-1)]/i]

Where,

C= Cash Flow per period

i = interest rate per period =12%/52 =0.2307923%

n=number of period =52*2 =104

= $91.5+91.5[ 1-(1+0.0023076923)^-(104-1) /0.0023076923]

= $91.5+91.5[ 1-(1.0023076923)^-103 /0.0023076923]

= $91.5+91.5[ (0.2113) ] /0.0023076923

= $8471.08 c. 8,471.08