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# 1. You are comparing two investments, both of which provide

### Resolved Question:

1. You are comparing two investments, both of which provide annuity payments in exchange for a lump sum investment today. Each annuity is for a period of 25 years and each pays \$500 a month. You require a 7 percent return on these investments. Annuity A pays at the beginning of each month and annuity B pays at the end of each month. Given this information, which one of the following statements is correct?

A. Both annuities are equally valuable today. B. Annuity B is worth more today because of the timing of its cash flows. C. Annuity A is worth more today because you will receive 25 payments whereas Annuity B only pays 24 payments. D. Annuity A has a higher present value and a lower future value than annuity B. E. Annuity A has both a higher present value and a higher future value than annuity B.

2. The Anderson Co. wants to borrow \$5,000 at the beginning of each year for six years at 7 percent interest. The firm will repay this money in one lump sum at the end of year 6. How much of the firm's loan repayment is due to the \$5,000 it received in year 4? A. \$5,000.00 B. \$5,724.50 C. \$6,125.22 D. \$6,553.98 E. \$7,503.65

3. The condominium at the beach that you want to buy costs \$249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? A. \$2,291.89 B. \$2,809.10 C. \$3,287.46 D. \$3,412.67 E. \$4,145.68

4. Fred was persuaded to open a credit card account and now owes \$5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred to pay off this balance if he makes monthly payments of \$70 rather than \$85? A. 40.12 months B. 71.28 months C. 93.04 months D. 114.93 months E. 132.83 months

5. Sky Investments offers an annuity due with semi-annual payments for 10 years at 7 percent interest. The annuity costs \$90,000 today. What is the amount of each annuity payment? A. \$6,118.35 B. \$6,332.50 C. \$7,210.64 D. \$7,939.59 E. \$8,495.36

6. What is the present value of \$1,200 received at the end of each year for eight years starting in year 4 and ending in year 11 if the discount rate is 10 percent? A. \$3,975.08 B. \$4,372.59 C. \$4,809.85 D. \$6,183.65 E. \$6,401.91

7. Boyer & Son's just took out a 7.5 percent interest-only loan of \$30,000 for ten years. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of year ten? A. \$22,500 B. \$32,250 C. \$45,750 D. \$50,250 E. \$64,500

The Clark Co. is borrowing \$150,000 for six years at an APR of 9 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 5 of this loan? A. \$25,000 B. \$29,500 C. \$31,750 D. \$34,000 E. \$36,250

Submitted: 7 years ago.
Category: Homework
Expert:  David replied 7 years ago.

The Excel file is here

1. E is correct because the cash flows between two annuities are almost the same, the difference is only at very first payment and very lat payment. Annuity A pays 500 today, while annuity B pays 500 at the end of 25 year, so the present value and the future values of A is larger (since you would rather get 500 today than in 25 years.).

2. D is correct 5000, borrowed at the begining of year 4 will result in 5000*(1+0.07)^3 = 6125.22 , because they will be repaid in 3 years.

3. A is correct. you can use excel function =PMT(0.0675/12,120,199600). 199600 is your PV which is 80% of the initial cost.

4. D is correct. The problem should state \$85 rather than \$70 (you have the other way around. In this case he will pay in full in almost 115 months.

5. B is correct just use the annuitiformula for find A

The Present Value of an Annuity (PVA)
PVA = A *1-1
----
(1 + i)n

------

i

6. Correct answer is C, see the attached excell file

7. Correct answer is A. If it is interest only you pay just 7.5%*30,000=2,250 pear year, so in ten years it becomes 22,500.

Edited by David on 10/23/2009 at 4:34 PM EST
Expert:  Linda_us replied 7 years ago.
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