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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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