201FIN

Chapter 6: Tutorial 6

Question 1.
First National Bank charges 14.2% compounded monthly on its business loans. First United
Bank charges 14.5% compounded semi-annually. As a potential borrower, which bank would
you go to for a new loan?

Question 2.
You are planning to make monthly deposits of $300 into a retirement account that pays 10%
compounded monthly. If your first deposit will be made one month from now, how large will
your retirement account be in 30 years?

Question 3.
Beginning three months from now, you want to be able to withdraw $2,300 each quarter from
your bank to cover college expenses over the next four years. If the account pays 0.65% per
quarter, how much do you need to have in your bank account today to meet your expense
needs over the next four years?
Question 4.
What is the present value of $4,000 per year, at a discount rate of 10%, if the first payment is
received 8 years from now and the last payment is received 25 years from now?

Question 5.
Suppose you are going to receive $10,000 per year for five years. The discount rate is 11%.
a. What is the PV of the payment if they are in the form of an ordinary annuity? What is
the PV if the payments are an annuity due?

b. Suppose you plan to invest the payments for 5 years. What is the FV if the payments
are an ordinary annuity? What if the payments are an annuity due?