Case 1

FNBSLW 344

Instructions:

1.

Answer all the questions clearly. Draw

timelines where appropriate and show your work. If you use
your calculator,

write down the appropriate keystrokes.

2.

For hand-written solutions, make sure

that they are legible and clear.

1.

(a) What is the future value of an

initial $100 after 3 years if it is invested in an account
paying 10 percent

annual interest?

(b) What is the

present value of $100 to be received in 3 years if the
appropriate interest

rate is 10 percent?

2.

(a) What is the future value of a 3-year

ordinary annuity of $100 if the appropriate interest rate is
10 percent?

(b) What is the present

value of the annuity?

(c) What would the

future and present values be if the annuity were an annuity
due?

3.

Suppose

someone offered to sell you a note that would pay $1,000
fifteen months from

today. They offer to sell it to you for

$850. You have $850 in a bank time

deposit that pays 6.76649 percent nominal rate with daily
compounding, which is

a 7 percent effective annual interest rate, and you plan to
leave the money in

the bank unless you buy the note. The

note is not risky- you are sure it will be paid on schedule.
Should you buy the note? Check the decision

in three ways: (a) by comparing your future value if you buy
the note versus

leaving your money in the bank, (b) by comparing the PV of
the note with your

current bank account, and (c) by comparing the EAR on the
note versus that of

the bank account.

Case 1

FNBSLW 344

Instructions:

1.

Answer all the questions clearly. Draw

timelines where appropriate and show your work. If you use
your calculator,

write down the appropriate keystrokes.

2.

For hand-written solutions, make sure

that they are legible and clear.

1.

(a) What is the future value of an

initial $100 after 3 years if it is invested in an account
paying 10 percent

annual interest?

(b) What is the

present value of $100 to be received in 3 years if the
appropriate interest

rate is 10 percent?

2.

(a) What is the future value of a 3-year

ordinary annuity of $100 if the appropriate interest rate is
10 percent?

(b) What is the present

value of the annuity?

(c) What would the

future and present values be if the annuity were an annuity
due?

3.

Suppose

someone offered to sell you a note that would pay $1,000
fifteen months from

today. They offer to sell it to you for

$850. You have $850 in a bank time

deposit that pays 6.76649 percent nominal rate with daily
compounding, which is

a 7 percent effective annual interest rate, and you plan to
leave the money in

the bank unless you buy the note. The

note is not risky- you are sure it will be paid on schedule.
Should you buy the note? Check the decision

in three ways: (a) by comparing your future value if you buy
the note versus

leaving your money in the bank, (b) by comparing the PV of
the note with your

current bank account, and (c) by comparing the EAR on the
note versus that of

the bank account.

Case 1

FNBSLW 344

Instructions:

1.

Answer all the questions clearly. Draw

timelines where appropriate and show your work. If you use
your calculator,

write down the appropriate keystrokes.

2.

For hand-written solutions, make sure

that they are legible and clear.

1.

(a) What is the future value of an

initial $100 after 3 years if it is invested in an account
paying 10 percent

annual interest?

(b) What is the

present value of $100 to be received in 3 years if the
appropriate interest

rate is 10 percent?

2.

(a) What is the future value of a 3-year

ordinary annuity of $100 if the appropriate interest rate is
10 percent?

(b) What is the present

value of the annuity?

(c) What would the

future and present values be if the annuity were an annuity
due?

3.

Suppose

someone offered to sell you a note that would pay $1,000
fifteen months from

today. They offer to sell it to you for

$850. You have $850 in a bank time

deposit that pays 6.76649 percent nominal rate with daily
compounding, which is

a 7 percent effective annual interest rate, and you plan to
leave the money in

the bank unless you buy the note. The

note is not risky- you are sure it will be paid on schedule.
Should you buy the note? Check the decision

in three ways: (a) by comparing your future value if you buy
the note versus

leaving your money in the bank, (b) by comparing the PV of
the note with your

current bank account, and (c) by comparing the EAR on the
note versus that of

the bank account.

Case 1

FNBSLW 344

1.

Answer all the questions clearly. Draw

timelines where appropriate and show your work. If you use
your calculator,

write down the appropriate keystrokes.

2.

For hand-written solutions, make sure

that they are legible and clear.

(a) What is the future value of an

initial $100 after 3 years if it is invested in an account
paying 10 percent

annual interest?

(b) What is the

present value of $100 to be received in 3 years if the
appropriate interest

rate is 10 percent?

(a) What is the future value of a 3-year

ordinary annuity of $100 if the appropriate interest rate is
10 percent?

(b) What is the present

value of the annuity?

(c) What would the

future and present values be if the annuity were an annuity
due?

Suppose

someone offered to sell you a note that would pay $1,000
fifteen months from

today. They offer to sell it to you for

$850. You have $850 in a bank time

deposit that pays 6.76649 percent nominal rate with daily
compounding, which is

a 7 percent effective annual interest rate, and you plan to
leave the money in

the bank unless you buy the note. The

note is not risky- you are sure it will be paid on schedule.
Should you buy the note? Check the decision

in three ways: (a) by comparing your future value if you buy
the note versus

leaving your money in the bank, (b) by comparing the PV of
the note with your

current bank account, and (c) by comparing the EAR on the
note versus that of

the bank account.