Question 1

An annuity is:

Accepted Answer

An annuity is a financial product that provides a stream of payments over a period of time. It is often used for retirement savings or as a source of income during retirement. Lotteries do use annuities as a payout option, where the prize is paid out in regular installments over a number of years. An annuity can be made up of equal or varying payments. Therefore, option A, B, and D are all incorrect. Therefore, the best answer is C.

Question 2

Ordinary annuity payments are made:

Accepted Answer

Ordinary annuity payments are made at the end of the period, which could be monthly, quarterly, semi-annually, or annually. Therefore, choices B, C, and D are incorrect. Choice E is also incorrect because the question is asking for the timing of payments, not whether the payments are being made.

Question 3

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):

Accepted Answer

The answer of At the beginning of each year, Bill...

Question 4

Annuity due payments are made:

Accepted Answer

Annuity due payments are made at the beginning of the period, as opposed to regular annuities where payments are made at the end of the period. This difference in payment timing affects the calculation of the annuity's future value and present value.

Question 5

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.)

Accepted Answer

The answer of How much would Howard Steele need to...

Question 6

Payments in annuities must be made:

Accepted Answer

The answer of Payments in annuities must be made:
...

Question 7

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):

Accepted Answer

The value of Ted's annuity can be calculated using the future value of an annuity formula, which is FV = P * [(1 + r)^n - 1] / r, where P is the payment amount, r is the annual interest rate, and n is the number of periods. Using the given information (P = $500, r = 0.08, n = 8), and referring to annuity tables for simplification, the closest match is $5,318.30, which indicates that the annuity tables were used to find the future value of these periodic payments at the given interest rate and time period.

Question 8

Contingent annuities:

Accepted Answer

Contingent annuities do not have a fixed amount of payments and are dependent on certain events, such as the death of the annuitant. Therefore, option D is the best choice.

Question 9

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today? (Use the tables in the handbook.)

Accepted Answer

The answer of Nancy Billows promised to pay her son...

Question 10

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

Accepted Answer

An annuity due is a series of equal payments made at the beginning of each period. Adding one extra period to the end of the annuity due will convert it to an ordinary annuity, where payments are made at the end of each period. To account for this change, one payment needs to be subtracted from the total value when using the ordinary annuity table. Therefore, the correct choice is B, subtract one payment from total value.

Question 11

A sinking fund:

Accepted Answer

A sinking fund is a fund set up by an entity to set aside money to pay back a loan or bond. It aids in meeting a future obligation and reduces the risk of default. It does not require a lump sum payment at the beginning and can involve regular contributions over time. It is considered a type of annuity because it involves regular payments, but it is not an annuity in the traditional sense because it does not provide a guaranteed stream of income. The money in a sinking fund is typically invested and may compound over time.

Question 12

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

Accepted Answer

An annuity due results in a higher value compared to an ordinary annuity because the payments are made at the beginning of each period rather than at the end. This means that in an annuity due, the payments have one extra period to earn interest, resulting in a higher overall value.

Question 13

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

Accepted Answer

The future value of an ordinary annuity is calculated as:FV = P * [(1 + r)^n - 1] / rwhere:P is the periodic paymentr is the annual interest raten is the number of periodsIn this case, P = $9,000, r = 8%, and n = 20. Plugging these values into the formula, we get:FV = $9,000 * [(1 + 0.08)^20 - 1] / 0.08 = $411,858.00Therefore, the final value of Joe's investment at the end of the 20th year is $411,858.00.

Question 14

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):

Accepted Answer

First, we need to find the future value of the loan in 12 years at 8% compounded semiannually:
PV = -60,000
n = 12 * 2 = 24 (since there are two payments per year)
i = 8%/2 = 4% (since it's compounded semiannually)
FV = PV * (1+i)^n = -60,000 * (1+0.04)^24 = $146,515.69

Now, we need to find the periodic payment that will accumulate to $146,515.69 in 12 years at 8% compounded semiannually:
n = 12 * 2 = 24
i = 8%/2 = 4%
FV = $146,515.69
Using the annuity payment formula, we get:
PMT = FV / [(1+i)^n - 1] / i = $1536.44  (rounded off to $1,536)

Therefore, the amount to be paid into the fund each period is $1,536. Answer (B) is the correct choice.

Question 15

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):

Accepted Answer

The correct value is not listed among the options provided. To calculate the value of an annuity due (where payments are made at the beginning of each period), we use the formula for the future value of an annuity due, considering the compounding frequency and the timing of the payments. The options given do not accurately reflect the calculation based on the information provided (10% compounded semiannually, $1,600 invested at the beginning of each year for eight years).

Question 16

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

Accepted Answer

In an ordinary annuity, the interest on a yearly investment starts building at the end of the first period, as payments are made at the end of each period.

Question 17

Lance Rice has decided to invest $1,200 quarterly for eight years in an ordinary annuity at 4%. The total cash value of the annuity at end of year 8 is (use the tables in the handbook):

Accepted Answer

Using the formula for the future value of an ordinary annuity, we have:
FV = PMT * ((1 + r)^n - 1) / r
where PMT is the quarterly payment, r is the quarterly interest rate (4%/4 = 1%), and n is the number of quarters (8*4 = 32).
Plugging in the numbers, we get:
FV = 1200 * ((1 + 0.01)^32 - 1) / 0.01
FV = $44,992.92 (rounded to the nearest cent)

Question 18

The present value of an ordinary annuity:

Accepted Answer

The present value of an ordinary annuity indicates how much money needs to be invested today in order to receive a stream of future payments.

Question 19

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.)

Accepted Answer

To find the present value of an annuity (the amount that must be deposited today), we use the formula for the present value of an annuity, which considers the annual payment, the interest rate, and the number of periods. Given the annual payment of $18,000, an interest rate of 9%, and a duration of 20 years, the correct calculation using the present value of an annuity table or a financial calculator would result in approximately $164,313, which matches option C.

Question 20

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):

Accepted Answer

The answer of Jones Co. borrowed money that is to...

Quiz 13: Annuities and Sinking Funds

An annuity is:

Ordinary annuity payments are made:

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) :

Annuity due payments are made:

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.)

Payments in annuities must be made:

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) :

Contingent annuities:

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today? (Use the tables in the handbook.)

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

A sinking fund:

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

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

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) :

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) :

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

Lance Rice has decided to invest $1,200 quarterly for eight years in an ordinary annuity at 4%. The total cash value of the annuity at end of year 8 is (use the tables in the handbook) :

The present value of an ordinary annuity:

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.)

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) :

Quiz 13: Annuities and Sinking Funds

An annuity is:

Ordinary annuity payments are made:

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) :

Annuity due payments are made:

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.)

Payments in annuities must be made:

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) :

Contingent annuities:

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today? (Use the tables in the handbook.)

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

A sinking fund:

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

Joe Sullivan invests $9,000 at the end of each year for 20 years. The rate of interest Joe gets 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) :

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) :

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) :

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

Lance Rice has decided to invest $1,200 quarterly for eight years in an ordinary annuity at 4%. The total cash value of the annuity at end of year 8 is (use the tables in the handbook) :

The present value of an ordinary annuity:

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.)

Jones Co. borrowed money that is to be repaid in 12 years. So that the loan will be paid back at end of the 12th 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) :

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

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) :