Reference no: EM132820182
1. On a contract you have a choice of receiving $25,000 six years from now or $50,000 twelve years from now. At what implied compound annual interest rate should you be indifferent between the two contracts?
2. Sarah D wishes to purchase an annuity contract that will pay him $7,000 a year for the rest of his life. The Philo Life Insurance Company figures that his life expectancy is 20 years, based on its actuary tables. The company imputes a compound annual interest rate of 6% in its annuity contracts.
a. How much will Sarah have to pay for the annuity?
b. How much would he have to pay if the interest rate were 8%?
3. You borrow $10,000 at 14% compound annual interest for four years. The loan is repayable in four equal annual installments payable at the end of the year.
a. What is the annual payment that will completely amortize the loan over four years? Round to the nearest dollar.
b. Of each equal payment, what is the amount of interest? The amount of loan principal? ( Hint: In early years, the payment is composed largely of interest, whereas at the end it is mainly principal).
4. Your late Uncle Pnoy will entitle you to receive $1,000 at the end of other year for the next two decades. The first cashflow is two years from now. At a 10% compound annual interest rate, what is the present value of this unusual cash flow pattern?
5. On December 31, 2013, Jet Co. received a $10,000 note receivable from Maxx, Inc. in exchange for services rendered. Interest is calculated on the outstanding balance at the interest rate of 3% compounded annually and payable at maturity. The note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2013, was 8%. The compound interest factors are as follows:
Future value of $1 due in nine months at 3% 1.0225
Future value of $1 due in five years at 3% 1.1593
Present value of $1 due in nine months at 8% 0.944
Present value of $1 due in five years at 8% 0.680
At what amounts should this note receivable be reported in Jet's December 31 balance sheet?
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