Deck 13: Annuities and Sinking Funds

Question 1

There is only one class of annuities.

Answer 1

False

Question 2

All annuities due are based on a semiannual payment.

Answer 2

False

Question 3

Annuities certain have a specific stated number of payments.

Answer 3

True

Question 4

The maturity value in compounding is like the value of an annuity.

Question 5

The value of an annuity is the series of payments and interest.

Question 6

An annuity is one lump sum payment.

Question 7

The same table can be used to find the value of an annuity due if two extra periods are added along with the subtraction of one payment.

Question 8

The amount of money one needs to invest in the future to receive a stream of payments in the present is called the present value of an ordinary annuity.

Question 9

An annuity due provides a lower final value compared with an ordinary annuity.

Question 10

Companies that plan to retire bonds in the future could utilize sinking funds.

Question 11

Insurance companies do not use annuities.

Question 12

A contingent annuity has a fixed amount of payments.

Question 13

Annuities can be done manually or by computer.

Question 14

Sinking funds utilize the concept of compound interest.

Question 15

Maturity value is equal to principal plus interest.

Question 16

Interest is not calculated in ordinary annuities.

Question 17

The present value of an annuity looks from the present to the future.

Question 18

Sinking funds accumulate money in the present to accumulate a specific sum at a predetermined present date.

Question 19

An ordinary annuity results in the deposit or payment being made at end of the period.

Question 20

An annuity due requires that deposits or payments be made at the end of the period.

Question 21

An annuity due compared with an ordinary annuity results in a:

A)Higher value
B)Lower value
C)Same value
D)Value three times the annuity due
E)None of these

Question 22

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 20% in an ordinary annuity, she must invest how much today? (Use the tables in the handbook.)

A)$10,759.38
B)$10,759.83
C)$14,194.44
D)$6,861.54
E)$6,502.68

Question 23

A sinking fund:

A)Requires at the beginning one lump sum payment
B)Is really not an annuity
C)Aids in meeting a future obligation
D)Does not compound its money
E)None of these

Question 24

Lee Associates borrowed $60,000. The company plans to set up a sinking fund that will pay back the loan at the end of 12 years. Assuming a rate of 8% compounded semiannually, the amount to be paid into the fund each period is (use the tables in the handbook):

A)$1,350
B)$1,536
C)$1,653
D)$5,163
E)None of these

Question 25

An annuity due can use the ordinary annuity table if one extra period is added and:

A)Add one payment to total value
B)Subtract one payment from total value
C)Add two payments to total value
D)Subtract three payments from total value
E)None of these

Question 26

Ordinary annuity payments are made:

A)At the end of the period
B)Yearly
C)Monthly
D)At the beginning of the period
E)None of these

Question 27

Joe Sullivan invests $9,000 at the end of each year for 20 years. The rate of interest Joe earns is 8% annually. The final value of Joe's investment at the end of the 20th year on this ordinary annuity is (use the tables in the handbook):

A)$411,588.00
B)$88,362.90
C)$411,858.00
D)$88,632.90
E)None of these

Question 28

At the beginning of each year, Bill Ross invests $1,400 semiannually at 8% for nine years. The cash value of the annuity due at the end of the ninth year is (use the tables in the handbook):

A)$38,739.68
B)$37,399.68
C)$37,939.86
D)$37,339.68
E)None of these

Question 29

How much would Howard Steele need to invest today so that he may withdraw $12,000 each year for the next 20 years, assuming a rate of 8% compounded annually? (Use the tables in the handbook.)

A)$117,817.20
B)$454,144.00
C)$112,817.20
D)$549,144
E)None of these

Question 30

The present value of an ordinary annuity:

A)Tells how much money one needs to invest in the future
B)Is a lump sum
C)Can only be calculated manually
D)Indicates how much money needs to be invested today
E)None of these

Question 31

Annuity due payments are made:

A)Monthly
B)At the beginning of the period
C)Yearly
D)At the end of the period
E)None of these

Question 32

Payments in annuities are made:

A)Monthly
B)Quarterly
C)Semiannually
D)Yearly
E)All of these

Question 33

Ted Williams made deposits of $500 at the end of each year for eight years. The rate is 8% compounded annually. The value of Ted's annuity at the end of eight years is (use the tables in the handbook):

A)$5,318.30
B)$4,318.30
C)$2,837.03
D)$2,873.30
E)None of these

Question 34

Ed Sloan invests $1,600 at the beginning of each year for eight years into an account that pays 10% compounded semiannually. The value of the annuity due is (use the tables in the handbook):

A)$41,344.48
B)$1,600.00
C)$38,744.48
D)$37,744.48
E)None of these

Question 35

In an ordinary annuity the interest on a yearly investment starts building interest:

A)At the beginning of the first period
B)At the end of the first period
C)During the first period
D)After the second period ends
E)None of these

Question 36

Contingent annuities:

A)Have a fixed amount of payments
B)Pay for 30 years
C)Are only paid by the month
D)Have no fixed amount of payments
E)None of these

Question 37

Abby Mia wants to know how much must be deposited in her local bank today so that she will receive yearly payments of $18,000 for 20 years at a current rate of 9% compounded annually. (Use the tables in the handbook.)

A)$1,085.82
B)$1,463.13
C)$164,313
D)$163,313
E)None of these

Question 38

Jones Co. borrowed money that is to be repaid in 12 years. So that the loan will be paid back at end of the 12^th year, the company invests $8,000 at end of each year at 5% compounded annually. The amount of the original loan was (use the tables in the handbook):

A)$127,336.80
B)$70,905.60
C)$127,636.80
D)$70,950.60
E)None of these

Question 39

Lance Rice has decided to invest $1,200 quarterly for five years in an ordinary annuity at 8%. The total cash value of the annuity at end of year 8 is (use the tables in the handbook):

A)$25,196.75
B)$29,156.76
C)$22,711.30
D)$7,039.92
E)None of these

Question 40

An annuity is:

A)Not used by lotteries today
B)A one-time payment
C)A stream of payments
D)Never made up of equal payments
E)None of these

Question 41

Connie made deposits of $2,000 at the beginning of each year for four years. The rate she earned is 5% annually. What is the value of Connie's account in four years?

A)$11,051.00
B)$8,260.20
C)$8,260.00
D)$9,051.20
E)None of these

Question 42

Match the following terms with their definitions.

-Present value of annuity

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 43

At the beginning of each year for 14 years, Sherry Kardell invested $400 that earns 10% annually. What is the future value of Sherry's account in 14 years?

A)$12,309
B)$13,100
C)$14,000
D)$12,709
E)None of these

Question 44

Complete present value of an ordinary annuity:
$$\begin{array} { | l | l | l | l | l | } \hline \begin{array} { l } \text { Amount of } \\\text { Annuity Expected }\end{array} & \text { Payment } & & \text { Interest Rate } & \\& \text { Payable } & \text { Years } & \text { Earned } & \text { Present Value } \\\hline \$ 16,000 & \text { Quarterly } & 2 & 12 \% & ? \\\hline\end{array}$$

Question 45

Complete present value of an ordinary annuity:
$$\begin{array} { | l | l | l | l | l | } \hline \begin{array} { l } \text { Amount of } \\\text { Annuity Expected }\end{array} & \text { Payment } & & \text { Interest Rate } & \\& \text { Payable } & \text { Years } & \text { Earned } & \text { Present Value } \\\hline \$ 8,500 & \text { Semiannually } & 4 & 10 \% & ? \\\hline\end{array}$$

Question 46

Match the following terms with their definitions.

-Annuities certain

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 47

Match the following terms with their definitions.

-Contingent annuities

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 48

Match the following terms with their definitions.

-Sinking fund

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 49

Scott deposits $5,000 at the end of each year into an account for five years. Assuming 6% interest annually, what is the value of his account in five years?

A)$67,060
B)$21,873
C)$30,100
D)$28,185.50
E)None of these

Question 50

Complete this ordinary annuity:
$$\begin{array} { | l | l | l | l | l | } \hline \begin{array} { l } \text { Amount of } \\\text { Payment }\end{array} & \begin{array} { l } \text { Payment } \\\text { Payable }\end{array} & \text { Years } & \text { Interest Rate } & \begin{array} { l } \text { Value of } \\\text { Annuity }\end{array} \\\hline \$ 9,000 & \text { Semiannually } & 4 & 10 \% & ? \\\hline\end{array}$$

Question 51

Complete this annuity due: (round answer to the nearest cent)
$$\begin{array} { | l | l | l | l | l | } \hline \begin{array} { l } \text { Amount of } \\\text { Payment }\end{array} & \begin{array} { l } \text { Payment } \\\text { Payable }\end{array} & \text { Years } & \text { Interest Rate } & \begin{array} { l } \text { Value of } \\\text { Annuity }\end{array} \\\hline \$ 750 & \text { Quarterly } & 4 & 16 \% & ? \\\hline\end{array}$$

Question 52

Alice Wolf wants to know how much she will have to invest today in order to receive an annuity of $10,000 for six years if interest is earned at 7% annually. She will make all her withdrawals at the end of each year. How much should she invest?

Question 53

Match the following terms with their definitions.

-Annuity

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 54

Bram Johnson invests $500 at the end of each quarter for 10 years. The account earns 12% interest annually. What is the value of the account at the end of 10 years?

A)$37,700
B)$37,700.60
C)$37,000
D)$3,700
E)None of these

Question 55

What must Bill McGuire invest today to receive an annuity of $12,000 for four years semiannually at a 10% annual rate? All withdrawals will be made at the end of each period.

Question 56

Match the following terms with their definitions.

-Annuity due

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 57

Match the following terms with their definitions.

-Value of an annuity

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 58

Match the following terms with their definitions.

-Ordinary annuities

A)Paid at end
B)Beginning as well as ending dates
C)Paid at beginning
D)Need to invest today to receive the stream
E)Set aside payments to build to future amount
F)Beginning as well as ending dates, not fixed
G)Sum of series of payments
H)Stream of payments

Question 59

Using the sinking fund table, complete:
$\begin{array}{l|l|l|l|l}\hline \text { Required Amount } & \text { Freq of } & & & \text { Payment Amount end of } \\\text { Needed } & \text { Payment } & \text { Years } & \text { Interest Rate } & \text { each period } \\\hline \$ 40,000 & \text { Quarterly } & 7 & 8 \% & ?\\\hline\end{array}$

Question 60

Jorgen Grace made deposits of $250 at the end of each year for 12 years. The rate received was 6% annually. What is the value of the investment after 12 years?

A)$2,028
B)$3,000
C)$4,217.48
D)$4,200
E)None of these

Question 61

At the beginning of each period for 9 years, Scott Sullivan invested $900 at 4% interest compounded semiannually. What is the value of this annuity due?

Question 62

Find the value of an investment after three years on $15,000 made quarterly at 8% for (A)an ordinary annuity and (B)an annuity due.

Question 63

Abby's Uncle Howard has promised her a gift upon graduation from high school of $2,000 or $200 every quarter for the next three years. If the money could be invested at 8%, which offer should Abby choose? (Show your calculations.)

Question 64

Block Associates borrowed $75,000. The company plans to set up a sinking fund that will repay the loan after 16 years. Assume an 8% interest rate compounded semiannually. What must Block Associates pay into the fund each period?

Question 65

How much will the Apple Corporation have to set aside each year to have $60,000 ten years from now? Assume interest is at 10% compounded semiannually.

Question 66

Gail Korosa decided that in six years she will leave her job in publishing and retire to Arizona. What amount should Gail invest today so that she will be able to withdraw $50,000 at the end of each year for 30 years after she retires? Assume she can invest money at 5% interest compounded annually.

Question 67

Roger Fox made deposits of $900 semiannually to Reed Bank at the end of each period, which pays 6% interest compounded semiannually. After seven years Roger made no more deposits. What will be the balance in the account eight years after the last deposit?

Question 68

Find the value of an investment after six years for a $7,000 annuity due at 8% compounded annually.

Question 69

Art Newner wants to know how much he will have to invest today in order to receive an annuity of $8,000 for three years if interest is earned at 10% annually. He will make all his withdrawals at the end of each year. How much should Art invest?

Question 70

Mike O'Brien plans to deposit $1,250 at the end of every six months for the next eight years at 6% interest compounded semiannually. What is the value of Mike's annuity at the end of eight years?

Question 71

Find the value of an investment after four years on $6,000 made quarterly at 8% for (A)an ordinary annuity and (B)an annuity due.

Question 72

Jim Hunter is ready to retire to Florida. What amount should Jim invest today so that he will be able to withdraw $25,000 at the end of each year for 30 years after he retires? Assume he can invest money at 9% interest compounded annually.

Question 73

What must Bill McGuire invest today to receive an annuity of $9,000 for four years semiannually at an 8% annual rate? All withdrawals will be made at the end of each period.

Question 74

In 10 years, Longin Company will have to repay a $60,000 loan. Assume an 8% interest rate compounded quarterly. How much must Longin pay each period to have the $60,000 at the end of 10 years? Verify your result.

Question 75

Find the value of an investment after four years for a $7,000 ordinary annuity at 10% compounded annually.

Question 76

Rita Heckt wants to receive $4,200 each year for 15 years. How much must Rita invest today at 5% compounded annually?

Question 77

Find the value of an investment after five years for a $6,000 ordinary annuity at 8% compounded annually.

Question 78

Alice Wolf wants to know how much she will have to invest today in order to receive an annuity of $6,000 for four years if interest is earned at 10% annually. She will make all her withdrawals at the end of each year. How much should Alice invest?

Question 79

Angel Rowe wants to receive $7,500 each year for the next 25 years. Assume a 5% interest rate compounded annually. How much should Angel invest today?

Question 80

Find the value of an investment after four years for a $7,000 annuity due at 10% compounded annually.