3. Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth-maximizing investor which annuity would you choose? (Points : 1) The annuity due. The deferred annuity. Either one, because as the problem is set up, they have the same present value. Without information about the appropriate interest rate, we cannot find the values of the two annuities, hence we cannot tell which is better. The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred. |
4. Which of the following statements is correct? (Points : 1) For all positive values of r and n, FVIFr, n > 1.0 and PVIFAr, n > n. You may use the PVIF tables to find the present value of an uneven series of payments. However, the PVIFA tables can never be of use, even if some of the payments constitute n annuity (for example, $100 each year for Years 3, 4, and 5), because the entire series does not constitute an annuity. If a bank uses quarterly compounding for saving accounts, the simple rate will be greater than the effective annual rate. The present value of a future sum decreases as either the simple interest rate or the number of discount periods per year increases. All of the above statements are false. |
7. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (Points : 1) $1,171 $1,126 $1,082 $1,163 $1,008 |
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