Module 3 Flashcards
What effect does an assumption, regarding the rate of return, have on achieving a goal?
An assumption of a high rate of return may result in fewer dollars being invested to achieve a particular goal.
Why will the future value of an annuity due be greater than the future value of an ordinary annuity.
With an annuity due, the money is invested earlier (at the beginning of the period rather than at the end of the period).
John plans to invest $2,000 at the beginning of each year for the next 18 years. If he can earn 10%, compounded annually, on his investment, how much will he have accumulated at the end the this period?
$100,318
1 P/YR, begin mode, C ALL. 2000 +/- PMT, 10 I/YR, 18, downshift, N(18 compounding periods), solve for FV = $100,318.18.
Claudette plans to invest $5,000 in a variable annuity at the end of each year for the next 25 years. She believes she can earn an average annual return of 12% over this time. How much will she have accumulated at the end of 25 years?
$666,669
1 P/YR, end mode, C ALL. 5000 +/- PMT, 12 I/YR, 25, downshift, N (25 compounding periods), solve for FV = $666.669.35.
Valentina will receive semiannual payments of $4,000 a the end of each period for the next 10 years. She will receive her first payment six months from today, and her opportunity cost is 8%. What is the present value of these payments.
$56,536
2 P/YR, end mode, C ALL. 4000 PMT, 8 I/YR, 10, downshift, N(20 compounding periods), solve for PV = $54,361.31.
Which mode should college and retirement payments be in?
Begin because they are made at the beginning of the season.
Which mode should Auto Loans and a Home Mortgage be in.
End mode because they are due at the end of term.
What is a stream of payments or receipts made at the end of each period.
Ordinary annuity
Annuity Due
Payments or receipts are made at the beginning of each period.
Mortgages and auto loans are good examples.
Individual Retirement Account (IRA) will result in a higher account balance in the future.
James just won the lottery and has the choice of either taking a lump sum of $500,000 or receiving a payment of $62,000 at the beginning of each year for the next 10 years. If James believes the opportunity cost is 6%, what should he do?
The present value of the annuity is greater than $500,000 so James should take the annuity.
To make a comparison, we need to determine the PV of the annuity that is being offered.
1 P/YR, begin mode, C ALL. 62000 PMT, 6 I/YR, 10, downshift, N (10 compounding periods), solve for PV = $483,704.92.
Based on a present value of $483,705 for the annuity, James would be better off taking the $500,000 lump sum since it is greater.
PMT, N, FV, PV, I/YR
PMT payment N number of compounding periods FV future value PV represents present value I/YR interest rate per year
Roberta has $5,000 invested in a mutual fund and plans on adding $500 at the end of every quarter for the next five years. If she makes all of her quarterly contributions and earns a 7.5% return what will her investment in the fund be worth in five years?
$19,248
4 P/YR, end mode, C ALL. 5000 +/- PV, 500 +/- PMT, 7.5 I/YR, 5, downshift, N (20 compounding periods), solve for FV = $19,248.35.
The present value of $1,000 ordinary annuity payments that are made once a year for nine years and discounted at an annual rate of 6% is
$6,802
1 P/YR, end mode, C ALL. 1000 PMT, 6 I/YR, 9, downshift, N (9 compounding periods), solve for PV = $6,801.69.
Regina wants to accumulate $20,000 in three years to start her own business. She wants to be conservative and only count on earning a 1.5% return. What amount would Regina have to set aside monthly in order to reach her goal?
$543.50
12 P/YR, end mode, C ALL. 2000 FV, 1.5 I/YR, 3, downshift, N (36 compounding periods), solve for PMT = $543.50.
Zack inherited XYZ stock from his dad when it was worth $12,324. He has held onto XYZ, and seven years later, it is now worth $33,645. What annual rate of return has Zack earned on the stock?
15.43%
1 P/YR, end mode, C ALL. 12324 +/- PV, 33645 FV, 7, downshift, N (7 compounding periods), solve for I/YR = 15.43%.
