AGEC 330 Lecture 7

[Med] The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000 a year forever. The cost of the policy is $285,000. What is the rate of return on this policy?

(not 3.6%)

[Easy] Calculate the present value of a retirement fund if you put $2,000 in your savings account at the beginning of each of the next 50 years? Assume that your savings account pays 12% compounded annually.

18,602.08

[Easy] Simplified present value models cannot be utilized when the payments series is uniform or exhibits constant growth.

FALSE

[Easy] How much is an oil well worth today if it will pay royalties of $20,000 per year at the end of the next 10 years and will be sold for $200,000 at the end of the 10th year? Assume that the interest rate is 10% compounded monthly.

$1,587,305

[Easy] How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded annually?

$126.24

[Easy] How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded semiannually?

$126.67

[Easy] How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded monthly?

$127.05

[Med] Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9%, what is the current value of the lease?

$15,947.61

[Easy] George Jefferson established a trust fund that provides $150,000 in scholarships each year for worthy students. The trust fund earns a 4.25% rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?

$3,529,411.77

[Easy] How much is an oil well worth today if it will pay royalties of $20,000 per year at the end of the next 10 years and will be sold for $200,000 at the end of the 10th year? Assume that the interest rate is 10% compounded semiannually.

$324,622

[Hard] Suppose that a student plans to borrow money for an education at TAMU. For five years, he will borrow $8,000 at the end of each year. While in school, the bank will only charge 6.5% interest. On Graduation, at the end of five years, the student agrees to pay the loan off over 10 years at 7% interest. Payments will start at the end of six years; interest starts accruing at 10% at the end of five years. Calculate the annual loan payments.

$6,485.17

[Hard] Suppose that a student plans to borrow money for an education at TAMU. For four years, he will borrow $20,000 at the end of each year. While in school, the bank will only charge 6% interest. On Graduation, at the end of four years, the student agrees to pay the loan off over 20 years at 8% interest. Payments will start at the end of five years; interest starts accruing at 10% at the end of four years. Calculate the annual loan payments.

$8,911.29

[Med] John doesn't have enough money to invest now to provide the $10,000 honeymoon in 5 years. He wants to know how much he would need to deposit each year for the next 5 years to accumulate the $10,000, assuming he makes the first deposit one year from now and interest at 8% is compounded semiannually.

$832.91

[Easy] You are to receive $75 per year indefinitely. The market rate of interest for these types of payments is 8%. The price you would pay for this stream is:

$937.50

[Easy] You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75%. How much money must you deposit today to fund this gift for your heirs?

(not $1,333,333.33) (not $1,375,000.00)

[Easy] How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded quarterly?

(not $126.89)

[Easy] Suppose a parcel of land promises to return $2,400 per year per acre. What is the capitalized value of the land if interest rates are 12%

(not $224,000) (Not 22,400)

[Med] You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

(not 3.25%) (not 3.33%

[Easy] The length of the payment series and the level of interest rates interact to produce greater effects on present and future values as the payment series is longer and interest rates are greater.

True

[Easy] Suppose a parcel of land promises to return $200 per year per acre. What is the capitalized value of the land if interest rates are 1.5%

not 13 or $6,666.67