7) You have decided to open up a savings account. Your bank has offered you thre

Question

7) You have decided to open up a savings account. Your bank has offered you three interest options: A) 10.55% annually, B) 10.40% quarterly and C) 10.30% weekly. Which do you prefer? Answer: _________________________ Justify your answer: __________________________________________________________ ___________________________________________________________________________

8) What is the present value of $1,000 a month to be received for the next 50 years with an interest rate of 8.0% compounded monthly? Answer: _________________________

9) What is the present value of $12,000 a year to be received for the next 50 years with an interest rate of 8.0%? Answer: _________________________

10) You just won the Powerball, as a result you have the choice between taking $250 million today or taking a 20-year annuity. Interest rates are expected to hold at 3.75% over the next 20-years. How much would the annuity need to be annually for you to be indifferent between cash now or taking the annuity? Answer: _________________________

11) (Bonus Question – 5 points) What is the present value of $25,000 received in 10 years if interest rates are 6.5% with continuous compounding? Answer: _________________________

Explanation / Answer

EAR = (1+APR÷n)^n-1

n is number of compounding per year

1)

EAR = 10.55% (Since, annual compounding)

2)

EAR = (1+(10.4%÷4))^4-1

= 10.81%

3)

EAR = (1+10.3%÷52)^52-1

= 10.84%

Option (C) i will prefer as it has high EAR.

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