Questions:
1. On a deposit of $1,000 which of the following offers the greatest return on savings
Bank A - Simple annual interest rate of 6% annually
Bank B - An annual interest rate of 4.50% compounded annually
Bank C - An annual interest rate of 4.25% compounded quarterly
a. with the money being deposited for one year
b. with the money being deposited for five years
c. with the money being deposited for ten years
2. Suppose you purchase 150 shares of stock at $28 per share. If the stock increases in value by 10% per year, how many years would it take to double the price of the stock ?
3. Select the alternative which yields the greater net benefit. Each alternative has a purchase price of $1,000 and the $1,000 is returned after one year .
Alternative A: Lump sum revenue of $300 is received at the end of one year.
Alternative B: Quarterly payments of $50 are received, with interest compounded uarterly.
a. Draw a cash flow diagram for each alternative
b. Determine the better alternative for i = 4%/year
c. Determine the better alternative for i = 18%/year
4. You want to set up a college savings plan for your daughter who is currently 10 years old and will go to college when she is 18. You assume that when she starts college she will need to have $100,000 in the bank. How much do you need to save each year in order to
have the necessary funds if the current interest rate is 7% per year ?
5. Suppose you buy a stock for $15 per share and sell it for $25 per share after six years. What would be the interest rate on your investment ?
6. Suppose you were offered $2,250 but you would not receive it until the end of six years from today, or you could receive $1,500 today. Also suppose you did not need the money today, so you deposit the $1,500 in a bank account and take it out at the end of six years. What interest rate would you need to receive in order to match the promised amount of $2,250?