28. Three years ago your mutual fund account was worth $489. Today it is worth $

Question

28. Three years ago your mutual fund account was worth $489. Today it is worth $635. What is your annualized rate of retum over the past three years? A. 8.99% B. 9.10% C. 9.36% D. 9.59% E. 9.72% 29. What is the present value of $250 to be received at the end of each year for the next 6 years if the discount rate is 12%? A. $ 1,250.00 B. S 1,151.19 C.$ 1,027.85 D. S 1,500.00 E.$ 1,300.00 30. Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forsyer. How much do your parents nced to deposit into this trust fund today to achieve their goal if the fund can earn 6% interest? A. $678,342.13 B. $700,000.00 C. $1,413,435.76 D. $1,620,975.32 E. 51,666,66667 31. What is the effective annual rate of 105 percent APR compounded semi-annually? A. 10.60 percent B. 10.78 percent C 1092 percent D. 11.02 percent E. 11.18 peroeen 32. You have two choices for a bank loan: Bank A, which charges 8.75% APR compounded annually or Bank B, which charges 8.5% APR compounded monthly which bank would you choose? A. Bank A B. Bank B

Explanation / Answer

28) B is correct.

Annualized rate = (FV/PV)^(1/n) - 1 = (635/489)^(1/3) - 1 = 9.10%

29) C is correct.

Present Value can be calculated using PV function on a financial calculator

N = 6, I/Y = 12%, PMT = 250, FV = 0 => Compute PV = $1,027.85

30) E is correct.

Value of perpetuity = Annual Cash Flow / Interest rate = 100,000 / 6% = $1,666,666.67

31) B is correct.

EAR = (1 + APR/n)^n - 1 = (1 + 10.5%/2)^2 - 1 = 10.78%

32) A is correct.

EAR for Bank A = 8.75%

EAR for Bank B = (1 + 8.5%/12)^12 - 1 = 8.84% > 8.75%. Hence, you would choose Bank A which has lower EAR for loan.

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