1. a. Which of the following statements is true? a. In an annuity due payments o
ID: 2770487 • Letter: 1
Question
1. a. Which of the following statements is true?
a.
In an annuity due payments occur at the end of the period.
b.
In an ordinary annuity payments occur at the end of eachperiod.
c.
A perpetuity will mature at some point in the future.
d.
One cannot calculate the present value of a perpetuity.
(1)
receiving $6,000 today or
(2)
$7,200 in three years.
If you could invest your money at 8% compounded annually, whichoption should you pick?
a.
In an annuity due payments occur at the end of the period.
b.
In an ordinary annuity payments occur at the end of eachperiod.
c.
A perpetuity will mature at some point in the future.
d.
One cannot calculate the present value of a perpetuity.
Explanation / Answer
(b) Present Value of your Investment Amount (PV) =$1,000
Interest Rate = 5%
Number of Years = 5years
Future Value = Present Value (PV) * (1+r)t
= $1,000 * (1.05)5
= $1,000 *1.27628
=$1,276.28
(c) Number of Years = 4 years
Future Value of your down payment (FV) = $30,000
Present Value of your Investment Amount (PV) = $15,000
Interest Rate = ?
Present Value = Future Value / (1+r)4
$15,000 =$30,000 / (1+r)4
(1+r)4 = $30,000 / $15,000
The future value factor is 2. Using the Future value table at 4years time period and 19% interest rate we found the future valuefactor is 2. Thus, the interest rate is 19%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.