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Various Annuity- Related Questions

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1. $111,834 is the amount of an ordinary annuity of $6,000 for 4 years at 8% compounded quarterly. ()
True
False

2. The monthly payment of rent is an example of a renter's annuity. ()
True
False

3. A contingent annuity has a specific number of payment periods. ()
True
False

4. An annuity with payments made at the end of each period is called an ordinary annuity. ()
True
False

5. With an annuity due no interest is paid in the first period. ()
True
False

6. The amount of an $8,000.00, 10%, 5 year ordinary annuity compounded semiannually is $100,624. ()
True
False

7. The maturity value of a transaction is equal to the principal plus the rate. ()
True
False

8. The deposits or payments are made at the end of the period in ordinary annuities. ()
True
False

9. John owns five health food stores in the Columbia area, and they are realizing a good profit. John decides to invest a portion of the profits in an annuity offered by Penn Life Insurance. Penn Life will guarantee John 8% interest compounded quarterly for the first 5 years, as long as he deposits $10,000.00 every quarter of the term of the guaranteed rate. Assuming John fulfills the obligations of the investment, what will be the value of the investment at the end of the 5 year term? ()
$261,832.74
$245,446.58
$242,970.00
$255,446.40
none of the above

10. The sum of the payments of an annuity plus the interest is called the: ()
economic sum
amount of the annuity
financial total
payoff amount
none of the above

11. An annuity without a specific number of payment periods is termed a(n): ()
non-standard annuity
annual annuity
annuity certain
contingent annuity
none of the above

12. Nancy plays drums in a dance band on weekends in addition to her full-time job at the local junior college. Nancy decided on her 35th birthday to establish her own retirement savings account by investing $2,400.00 of her weekend earnings every six months into an ordinary annuity paying 12% interest compounded semiannually. If Nancy makes these regular deposits until her 65th birthday, how much will this retirement account be worth? ()
$1,297,503.10
$1,281,903.10
$1,297,503.01
$1,279,507.20
none of the above

13. Derek established his own retirement account ten years ago. He has discovered that he can obtain a better rate for the next 10 years at 12% interest compounded semiannually. Consequently, Derek established a new ordinary annuity account (beginning amount $0.00) and he will contribute $7,000.00 semiannually into the account for the next 10 years. What will be the value of this account at the end of the 10 year period? ()
$244,707.61
$83,652.59
$264,501.86
$257,502.00
none of the above

14. The table factor for an annuity due of 4% compounded semiannually for 4 years is: ()
8.923740
7.436704
2.981042
8.582961
none of the above

15. The amount of interest on an ordinary annuity of $11,600.00 for 5 years at 8% compounded semiannually is: ()
$139,269.60
$23,296.60
$116,000.00
$23,269.60
None of the above

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Solution Preview

See attached file.

1. This is correct. See the attached Excel 97-2003 spreadsheet.
2. This is true.
3. This is false. See question #11. It is contingent because the amount, rate or number of periods is uncertain.
4. This is true.
5. This is true. The first payment is made on the day the contract is signed.
6. This is correct. See the ...

Solution Summary

Using an Excel 97-2003 workbook, this solution answers 15 questions related to the present and future values of annuities, as well as the various types of annuities.

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BE2-19 Porter Company signed a lease for an office building for a period of 10 years. Under the lease agreement, a security deposit of $10,000 is made. The deposit will be returned at the expiration of the lease with interest compounded at 5% per year. What amount will Porter receive at the time the lease expires?

BE2-20 Gordon Company issued $1,000,000, 10-year bonds and agreed to make annual sinking fund deposits of $80,000. The deposits are made at the end of each year into an account paying 5% annual interest. What amount will be in the sinking fund at the end of 10 years?

BE2-25 Smolinski Company is considering an investment which will return a lump sum of $500,000 five years from now. What amount should Smolinski Company pay for this investment to earn a 15% return?

BE2-27 Kilarny Company is considering investing in an annuity contract that will return $20,000 annually at the end of each year for 15 years. What amount should Kilarny Company pay for this investment if it earns a 6% return?

BE2-32 Galway Bay Enterprises issued 10%, 8-year, $2,000,000 par value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2002, and are issued on that date. The discount rate of interest for such bonds on April 1, 2002, is 12%. What cash proceeds did Galway Bay receive from issuance of the bonds?

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