3. Rick deposited $2,750 into an account 8 years ago for an emergency fund. Toda

Question

3. Rick deposited $2,750 into an account 8 years ago for an emergency fund. Today, that account is worth $4,220. What annual rate of return did Rick earn on this account assuming no other deposits and no withdrawals?

4. You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

a These annuities have equal present values but unequal future values.

b These two annuities have both equal present and equal future values.

c Annuity B is an annuity due.

d Annuity A has a smaller future value than annuity B.

e Annuity B has a smaller present value than annuity A.

Explanation / Answer

3. r = [FV/PV]1/n - 1

= [$4,220/$2,750]1/8 - 1

= 1.0550 - 1 = 0.0550, or 5.50%

4.Option "D" and "E" are correct.

As the payment made on annuity due, have a higher present value than the regular annuity. This is because of the principle of time value of money, i.e. the value of one rupee, today is greater than the value of one rupee, after one year.

Annuity A is an Annuity Due, whereas Annuity B is an Ordinary annuity.

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