Question 1

Marion's grandfather will establish a trust that will pay her $1,500 every three months for 11 years. The first payment will be made six years from now, when she turns 19. If money is worth 6.5% compounded quarterly, what is today's economic value of the bequest?

Accepted Answer

$32,365.24

Question 2

What is the current economic value of an inheritance that will pay $2,000 to the beneficiary at the beginning of every three months for 20 years, starting when the beneficiary reaches 20 years of age, 4½ years from now? Assume that money is worth 6% compounded monthly. (Round to the nearest dollar.)

Accepted Answer

$71,795.00

Question 3

Using an inheritance he recently received, Sam wants to purchase a deferred annuity that will pay $5,000 every three months between age 60 (when he plans to retire) and age 65 (when his permanent pension will begin). The first payment is to be three months after he reaches 60, and the last is to be on his 65^th birthday. If Sam's current age is 50 years and 6 months, and the invested funds will earn 4.4% compounded quarterly, what amount must he invest in the deferred annuity?

Accepted Answer

$58,943.07

Question 4

A $35,000 loan bearing interest at 10% compounded quarterly was repaid, after a period of deferral, by quarterly payments of $1573.83 over 12 years. What was the time interval between the date of the loan and the first payment?

Accepted Answer

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Question 5

A $20,000 investment will be allowed to grow at 4.5% compounded semi-annually until it can support semi-annual withdrawals of $1,000 for 20 years. Rounded to the nearest month, how long before the first withdrawal must the investment be allowed to grow?

Accepted Answer

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Question 6

Nancy borrowed $8,000 from her grandfather to buy a car when she started college. The interest rate being charged is only 4.5% compounded monthly. Nancy is to make the first $200 monthly payment on the loan three years after the date of the loan. How long after the date of the initial loan will she make the final payment?

Accepted Answer

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Question 7

What amount of money invested now will provide payments of $500 at the end of every month for five years following a four-year period of deferral? The money will earn 5.4% compounded monthly.

Accepted Answer

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Question 8

How long is the period deferral if the first quarterly payment of a deferred annuity will be paid 3½ years from today?

Accepted Answer

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Question 9

Mrs. Corriveau has just retired at age 58 with $299,317 in her RRSP. She plans to live off other savings for a few years and allow her RRSP to continue to grow on a tax-deferred basis until there is a sufficient amount to purchase a 25-year annuity paying $2,000 at the end of each month. If her RRSP and the annuity each earn 3.75% compounded monthly, how much longer must she let her RRSP grow (before she buys the annuity)?

Accepted Answer

The answer of Mrs. Corriveau has just retired at age...

Question 10

If money can earn 10% compounded annually for the next 20 years, which of the following annuities has the greater economic value today: $1,000 paid at the end of each of the next 10 years, or 10 annual payments of $2,000 with the first payment occurring 11 years from today?

Accepted Answer

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Question 11

$10,000 was invested in a fund earning 7.5% compounded monthly. How many monthly withdrawals of $300 can be made if the first occurs 3½ years after the date of the initial investment? Count the final smaller withdrawal.

Accepted Answer

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Question 12

What is meant by a deferred annuity?

Accepted Answer

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Question 13

For the same n, PMT, and i, would it cost more or less to purchase a deferred annuity than an ordinary annuity? Explain.

Accepted Answer

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Question 14

Mr. Donatelli moved from Toronto to Winnipeg to take a job promotion. After selling their Toronto home and buying a home in Winnipeg, the Donatellis have $85,000 in cash on hand. If the funds are used to purchase a deferred annuity from a life insurance company providing a rate of return of 8.25% compounded annually, what payments will they receive at the end of every six months for 20 years after a 9-year deferral period?

Accepted Answer

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Question 15

Mr. Haddit plans to retire eight years from today. He projects that he will need $30,000 per year in his retirement which he assumes will be for 15 years. The first payment will be nine years from today. To fund his retirement, Mr. Haddit will invest a lump amount today and later use it to sustain the 15 withdrawals. If his investment earns 6% compounded annually, how much must he invest today?

Accepted Answer

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Question 16

During a one-week promotion, Al's Appliance Warehouse is planning to offer terms of "nothing down and nothing to pay for four months" on major appliances priced above $500. Four months after the date of sale, the first of eight equal monthly payments is due. If the customer is to pay interest at the rate of 12% compounded monthly on the outstanding balance from the date of sale, what will be the monthly payments on an automatic dishwasher priced at $995?

Accepted Answer

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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 3.75% compounded monthly?

Accepted Answer

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

Question 18

Negotiations between Delco Manufacturing and the union representing its employees are at an impasse. The union is seeking a 4.5% wage increase. Delco's offer is 2%. The employees have passed a vote authorizing job action. Suppose the union succeeds in winning the 4.5% increase after a two-month strike. For an employee 10 years from retirement, will there be any economic gain? Compare the current economic values of (1) 10 years' end-of-month wages at the employer's offer (102% of last year's wages) vs. (2) wages including a 4.5% increase to the same horizon but after a two-month strike. Assume money is worth 6% compounded monthly.

Accepted Answer

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Question 19

A conditional sale contract requires the debtor to make six quarterly payments of $569, with the first payment due in six months. What amount will a finance company pay to purchase the contract on the date of sale if the finance company requires a rate of return of 16% compounded quarterly?

Accepted Answer

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Question 20

Why do we terminate the period of deferral one payment interval before the first payment?

Accepted Answer

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Quiz 12: Annuities: Special Situations