6. An investment of $50,000 resulted in uniform income of $10,000 per year for 1
ID: 1102261 • Letter: 6
Question
6. An investment of $50,000 resulted in uniform income of $10,000 per year for 10 years and a single amount of 5000 in year 5. The rate of return on the investment was closest to:
A. 10.6% per yr
B. 14.2% per yr
C. 16.4% per yr
D. 18.6% per yr
Formula used:
7. If compounding is semiannual, find the effective annual interest rate that will make a present single payment of 5,000 equivalent to semiannual payments of 600 over 6 years.
A. 12.00%
B. 12.20%
C. 12.57%
D. 12.40%
Formula used:
8. The perpetual annual worth of investing 80,000 now and 20,000 per year starting in year 11 and continuing forever at 10% per year is closest to:
A. $28,000
B. $18,600
C. $15,700
D. $12,800
Formula used:
9. A 1-year interest rate of 12% per year, compounded continuously, is closest to the following interest rate:
A. 1% monthly effective rate
B. 3.25% effective quarterly rate
C. Simple 12.75 per year
D. All of the preceding
Formula used:
Explanation / Answer
6) An investment of $50,000 resulted in uniform income of $10,000 per year for 10 years and a single amount of 5000 in year 5. Find the rate of return on the investment by using the fact that PW of investment = PW of cash flows
50000 = 10000(P/A, i*, 10) + 5000(P/F, i*, 5)
Using interpolation, this turns out to be 16.38% This is closest to option C
7) If compounding is semiannual, the effective annual interest rate that will make a present single payment of 5,000 equivalent to semiannual payments of 600 over 12 semi annual periods to be
5000 = 600(P/A, i%, 12)
Interpolation provides an interest rate of 6.11% per half year or 12.22% which is closest to option B
9) A 1-year interest rate of 12% per year, compounded continuously, turns into effective interest rate as:
i* = exp(12%) - 1 = 12.75%. This is closest to C.
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