Chater 4 - WEEK 4 PDF

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WEEK 4...

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4.3 What is the difference between a perpetuity and an annuity? A cash flow stream that consists of the same amount being received or paid on a periodic basis is called an annuity. If the same payments are made periodically forever, the contract is called a perpetuity.

4.9 Why is EAR superior to the APR in measuring the true economic cost or return Unlike the APR, which reflects annual compounding, the EAR takes into account the actual number of compounding periods. For example, suppose there are two investment alternatives that both pay an APR of 10 per cent. Assume that the first pays interest annually and that the second pays interest quarterly. It would be a mistake to assume that both investments will provide the same return. The real return on the first one is 10 per cent, but the second investment actually provides a return of 10.38 per cent because of the quarterly compounding. Thus, this is the superior investment! 4.7 Present value of an ordinary annuity:An investment opportunity requires a payment of $592 for 12 years, starting a year from today. If your required rate of return is 8.8 per cent, what is the value of the investment today? - The value of the investment is 4282.19 4.10 Future value of an ordinary annuity:Silas Yeung is a sales executive at a Brisbane company. She is 25 years old and plans to invest $2296 every year in a retirement savings account, beginning at the end of this year until she turns 65 years old. If the retirement savings investment will earn 11.31 per cent annually, how much will she have in 40 years, when she turns 65 years old? - The answer is 1454986.63 (working out is on calculator)

4.15 Perpetuity:Your grandfather is retiring at the end of next year. He would like to ensure that he and, after he dies, his h. eirs receive payments of $11 309 a year forever, starting when he retires. If he can invest 9.9% per annum, how much does your grandfather need to incest to receive the desired cash flow - The answer is 114232.32 (working out is on calculator)

4.18 Effective annual interest rate: Cyclone Rentals borrowed $15550 from a bank for 3 years. If the quoted rate (APR) is 6.75 per cent, and the compounding is daily, what is the effective annual interest rate (EAR)? - The answer is 6.98%

4.20 Future value with multiple cash flows: Stephanie Holland plans to adopt the following investment pattern beginning next year. She will invest $2719 in each of the next 3 years and will then make investments of $3650, $3725, $3875 and $4000 over the following 4 years. If the investments are expected to earn 7.3 per cent annually, how much will she have at the end of the 7 years? Not sure

4.22 Calculating annuity payment: Marco Boncordo is a Year 9 student. He

currently has $7500 in a savings account that pays 5.65 per cent annually. Marco plans to use his current savings plus what he can save over the next 4 years to buy a car. He estimates that the car will cost $12 000 in 4 years. How much money should Marco save each year if he wants to buy the car?

Not sure...