Question 1

A contract requires end-of-month payments of $175 for another 8¼ years. What would an investor pay to purchase this contract if she requires a rate of return of 6% compounded monthly?

Accepted Answer

The answer of A contract requires end-of-month payments of $175...

Question 2

A new loan at 9% compounded quarterly requires quarterly payments of $727.88 for seven years. Rounded to the nearest dollar, what amount was borrowed?

Accepted Answer

The answer of A new loan at 9% compounded quarterly...

Question 3

Semiannual payments of $1240 will pay off the balance owed on a loan in 9½ years. If the interest rate on the loan is 9.9% compounded semiannually, what is the current balance on the loan?

Accepted Answer

The answer of Semiannual payments of $1240 will pay off...

Question 4

The original lender wishes to sell a loan contract delivering month-end payments of $350 for another 11 years and 5 months. At what price would an investor be prepared to buy the contract in order to "build in" a rate of return of 8.75% compounded monthly?

Accepted Answer

The answer of The original lender wishes to sell a...

Question 5

The rate of return offered by Reliance Insurance Co. on its 20-year annuities is 4.8% compounded monthly. What amount is required to purchase a 20-year annuity with month-end payments of $1000?

Accepted Answer

The answer of The rate of return offered by Reliance...

Question 6

Mr. and Mrs. Dafoe are doing some estimates of the amount of funds they will need in their RRSP to purchase an annuity paying $5000 at the end of each month. For each combination of term and monthly compounded interest rate in the following table, calculate the initial amount required to purchase the annuity.

Accepted Answer

The answer of Mr. and Mrs. Dafoe are doing some...

Question 7

Isaac wishes to purchase a 25-year annuity providing monthly payments of $1000 for the first 15 years and $1500 for the remaining 10 years. An insurance company has quoted him a rate of return of 4.8% compounded monthly for such an annuity. How much will he pay for the annuity?

Accepted Answer

The answer of Isaac wishes to purchase a 25-year annuity...

Question 8

What is the maximum price you should pay for a contract guaranteeing month-end payments of $500 for the next 12 years if you require a rate of return of at least 8% compounded monthly for the first five years and at least 9% compounded monthly for the next seven years?

Accepted Answer

The answer of What is the maximum price you should...

Question 9

The Ottawa Senators fired their coach two years into his five-year contract, which paid him $30,000 at the end of each month. If the team owners buy out the remaining term of the coach's contract for its economic value at the time of firing, what will be the settlement amount? Use 7.5% compounded monthly as the time value of money.

Accepted Answer

The answer of The Ottawa Senators fired their coach two...

Question 10

You have received two offers on the used car you wish to sell. Mr. Lindberg is offering $9500 cash, and Mrs. Martel's offer is five semiannual payments of $2000 including one on the purchase date. Which offer has the greater economic value using a discount rate of 6% compounded semiannually? What is the economic advantage in current dollars of the preferred alternative?

Accepted Answer

The answer of You have received two offers on the...

Question 11

Current Amounts Needed to Purchase an Annuity Go to the Student Edition of the student textbook's OLC. In the navigation bar, select "Chapter 10" in the drop-down box. In the list of resources for Chapter 10, select "Links in Student textbook" and then click on the link named "RRIF Annuities." Obtain high, low, and mid-range interest rate quotes from three financial institutions for a 20-year RRIF annuity. Assuming the interest rates are compounded monthly, calculate the amount required in each case to purchase a 20- year annuity paying $3000 at the end of each month.

Accepted Answer

The answer of Current Amounts Needed to Purchase an Annuity...

Question 12

Influence of Annuity Variables Go to the Student Edition of the student textbook's OLC. In the navigation bar, select "Chapter 10" in the drop-down box. In the list of resources for Chapter 10, select "Links in Student textbook" and then click on the link named "Influence of Annuity Variables." This interactive chart enables you to observe and compare the effects of changes in the variables PMT, n, and i on both the future value and present value of an annuity.
a )Enter PMT _ $100 and i _ 8% for both Annuity A and Annuity B. Set n _ 20 for Annuity A and n _ 40 for Annuity B. This means that B contains twice as many payments as A. In percentage terms.
(i) How much larger is the present value of B than the present value of A?
(ii) How much larger is the future value of B than the future value of A?
b) Enter PMT _ $100 and n _ 30 for both annuities. Set i _ 8% for Annuity A and i _ 9% for Annuity B. In relative terms, the interest rate for B is _ 12.5% larger than the rate for A. In percentage terms.
(i) How much smaller is the present value of B than the present value of A?
(ii) How much larger is the future value of B than the future value of A?

Accepted Answer

The answer of Influence of Annuity Variables Go to the...

Question 13

Determine the unknown value for the following deferred annuity. The annuity is understood to be an ordinary annuity after the period of deferral.

Accepted Answer

The answer of Determine the unknown value for the following...

Question 14

The first of ten semiannual payments of $2000 will be made 5½ years from today. What is the present value of this deferred annuity using a discount rate of 7% compounded semiannually?

Accepted Answer

The answer of The first of ten semiannual payments of...

Question 15

A life insurance company can invest funds to earn (after expenses) 8% compounded quarterly. A client wishes to purchase a five-year ordinary annuity that will commence 3½ years from now. What will the insurance company charge for the annuity if the quarterly payments are $750?

Accepted Answer

The answer of A life insurance company can invest funds...

Question 16

What minimum initial amount of money, invested to earn 9% compounded monthly, will support a monthly payout of $500 for 3½ years if the first payment occurs 2 years and 10 months from now?

Accepted Answer

The answer of What minimum initial amount of money, invested...

Question 17

What amount of money invested now will provide monthly payments of $200 for five years, if the ordinary annuity is deferred for 3½ years and the money earns 7.5% compounded monthly?

Accepted Answer

The answer of What amount of money invested now will...

Question 18

A deferred annuity is comprised of eight annual payments of $1500. What is the period of deferral if the present value of the payments, discounted at 7.9% compounded annually, is $6383.65

Accepted Answer

The answer of A deferred annuity is comprised of eight...

Question 19

For $30,000, Manny purchased a deferred annuity from an insurance company that will pay him quarterly payments of $1076.71 for 12½ years. The payments are based upon the purchase amount earning 7% compounded quarterly. When will Manny receive the first payment?

Accepted Answer

The answer of For $30,000, Manny purchased a deferred annuity...

Question 20

Ronelda has accumulated $33,173.03 in her RRSP. If she makes no further contributions and her RRSP continues to earn 9.75% compounded monthly, for how long a period of deferral must she wait before her RRSP can sustain month-end withdrawals of $400 for 15 years.

Accepted Answer

The answer of Ronelda has accumulated $33,173.03 in her RRSP....

Quiz 10: Ordinary Annuities: Future Value and Present Value