Answer the following questions and complete the following problems, as applicable. Unless otherwise directed, assume annual compounding periods in computational problems.

You may solve the following problems algebraically, or you may use a financial calculator or Excel spreadsheet. If you choose to solve the problems algebraically, be sure to show your computations. If you use a financial calculator, show your input values. If you use an Excel spreadsheet, show your input values and formulas.

Note: In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer.

1. Would you rather have a savings account that paid 4 percent interest, compounded on a monthly basis, or one that compounded interest on an annual basis. Why?

2. What is an amortization schedule, and what are some of its uses?

3."The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years?" (Cornett, Adair, and Nofsinger, 2012, p. 115).

4.What is the difference between an ordinary annuity and an annuity due?

5. "What is the future value of a $500 annuity payment over five years if interest rates are 9 percent?" (Cornett, Adair, and Nofsinger, 2012, p. 116). Recalculate the future value at 8 percent interest, and again, at 10 percent interest.

6."What is the present value of a $700 annuity payment over four years if interest rates are 10 percent?" (Cornett, Adair, and Nofsinger, 2012, p. 116). Recalculate the present value at 9 percent interest, and again, at 11 percent interest.

Solution Preview

1. Compounded interest is interest paid to you on interest previously earned. From a return standpoint, interest compounded monthly will accrue higher value than annually. For example, $100 that earns 10% interest for one year looks like this:
compounded monthly: $100 x 10%(12 months) = $110.47
compounded annually: $100 x 10% = $110

2. An amortization schedule is a payment plan detailing the interest and principal applied (blended payments). For example, in the early years of a home mortgage loan the majority of payments are applied to ...

Solution Summary

This solution is comprised of calculations for present value and future value of annuities. It also touches on compounded interest, amortization schedules, ordinary annuity and annuity due.

Explain whether this is true or false and indicate why:
"To find the present value of an uneven series of cashflows, you might find the PVs of the individual cashflows and then sum them. Annuity procedures can never be of use, even if some of the cashflows constitute an annuity (for example, $100 cash for Years 3, 4, 5, an

To find the present value of an uneven series of cashflows, you might find the PVs of the individual cashflows and then sum them. Annuity procedures can never be of use, even if some of the cashflows constitute an annuity (for example, $100 cash for Years 3, 4, 5, and 6), because the entire series is not an annuity. Is thi

Johnny has a technology that will be available in the near term. He anticipates his first annual cash flow from the technology to be $215,000, received two years from today. Subsequent annual cashflows will grow at 4% in perpetuity. What is the present value of the technology if the discount rate is 10%?
What is the relati

What does that term "timevalue of money" mean and how does it relate to the calculation of interest, present values of annuities, and payments to amortize a loan?

Find the present value of the following stream of cashflows, assuming that the firm's opportunity cost is 9%?
Yr. Amount
1-5 $10,000/yr.
6-10 $16,000/yr.
A. $10,972
B. $13,252
C. $79,348
D. $141,588

Describe the differences between perpetuities and annuities. Give examples of both types of products.
https://personal.vanguard.com/us/funds/byobjective/detail?category=LifeCycle
http://www.johnhancock.com/products/annuities.html
? Find one example of a perpetuity.
? Find one example of an annuity.
? How is the perpetu

A 65 year-old man is retiring and can take either $50,000 in cash or an ordinary annuity that promises to pay him $6,000 per year for as long as he lives. Which of the following statements is most correct?
a. Because of the timevalue of money, the man will always be better off taking the $50,000 up front.
b. The higher the

Payback is considered an unsophisticated budgeting techique, and as such ______.
gives no consideration to timing of cashflows and therefore the timevalue of money, gives no consideration to risk exposure, does consider the timing of cashflows and therefore gives explicit consideration to the timevalue of money, or g

1) Dr. Oats, a nutrition professor, invests $80,000 in a piece of land that is expected to increase in value by 14 percent per year for the next five years. She will then take the the proceeds and provide herself with a 10- year annuity. Assuming a 14% interest rate for the annuity how much will this be?
2) I have a contract

Explain whether the following statement is true or false: $100 a year for 10 years is an annuity, but $100 in year 1, $200 in year 2, and $400 in years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.