In comparing an ordinary annuity and an annuity due Student Help 1. In comparing an ordinary annuity and an annuity due, which of the following is true?
A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.
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B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.
C) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.
D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.
2. If the present value of a perpetual income stream is increasing, the discount rate must be ________.
C) changing unpredictably
D) increasing proportionally
3. Nico invested an amount a year ago and calculated his return on investment. He found that his
purchasing power had increased by 15 percent as a result of his investment. If inflation during the year
was 4 percent, then Nico’s ________.
A) real return on investment is more than 15 percent
B) nominal return on investment is more than 15 percent
C) nominal return on investment is less than 11 percent
D) real return on investment is equal to 4 percent
4. Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to
common stockholders are ________.
5. Combining two assets having perfectly negatively correlated returns will result in the creation of a
portfolio with an overall risk that ________.
A) remains unchanged
B) decreases to a level below that of either asset
C) increases to a level above that of either asset
D) stabilizes to a level between the asset with the higher risk and the asset with the lower risk
6. War, inflation, and the condition of the foreign markets are all examples of ________.
A) business specific risk
B) nondiversifiable risk
C) internal risk
D) unsystematic risk
a. Melissa would like to send her parents on a cruise for their 25th wedding anniversary. She has
priced the cruise at $25,000 and she has 10 years to accumulate this money. How much must Melissa deposit annually in an account paying 11 percent interest in order to have enough money to send her parents on the cruise?
b. What is the rate of return on an investment of $154,090 if the company expects to receive
$12,000 per year for the next 30 years?
c A beach house now costs $250,000. Inflation is expected to cause this price to
increase at 2 percent per year over the next 15 years before Steve and Stacy retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 10 percent in order to buy the beach house upon retirement?
d. Joe want to leave an amount to the Montana Tech foundation that will fund a $10,000 per year scholarship into perpetuity. The endowment will be given at the end of the tenth year. The rate of interest is expected to be 8 percent in all future periods. How much must Joe deposit at the end of each of the next ten years to fund this scholarship?
e. You just had your 25th birthday. You would like to retire in 40 years at the age of 65. You believe you will live for 25 years after retirement and would like to withdraw $100,000 per year in retirement starting at the beginning of your first year in retirement. You plan to fund this with forty annual contributions into a retirement plan starting at the end of the current year. You believe that 11 percent is an appropriate rate of return for all years.
How much will you need to have accumulated upon retirement at age 65? What is the amount of annual contribution required over the next 40 years to accumulate this amount?
a. Hewitt Packing Company has an issue of $1,000 par value bonds with a 12 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 14 percent rate of return. What is the value of these Hewitt Packing Company bonds?
b. On January 1, 2016, Zheng Corporation will issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate that is due January 1, 2027. This firm’s bonds currently are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?
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