Multiple Choice - Basic Portfolio Problems
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Multiple Choice- Annuities
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Solution
The future value of a lump sum at the end of five years is $1,000. The nominal interest rate is 10 percent and interest is compounded semiannually. Which of the following statements is most correct?
d. Both statements b and c are correct.
e. All of the statements above are correct.
(d)
The periodic interest rate is 10%/2 = 5 percent.
So the effective annual rate is (1+5%)^2 - 1 > 10%
You can earn 8 percent interest, compounded annually. How much must you deposit today to withdraw $10,000 in 6 years?
a. $5,402.69
b. $6,301.70
c. $6,756.76
d. $8,432.10
e. $9,259.26
Rate = 8%
FV = $10,000
Year = 6
Compute PV = 6301.70
Assume you are to receive a 20-year annuity with annual payments of $50. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20. You will invest each payment in an account that pays 10 percent. What will be the value in your account at the end of Year 30?
a. $6,354.81
b. $7,427.83
c. $7,922.33
d. $8,591.00
e. $6,752.46
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