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Question;21. You are considering two equally risky annuities, each of;which pays $5,000 per year for 10 years.;Investment ORD is an ordinary (or deferred) annuity, while Investment;DUE is an annuity due. Which of the;following statements is CORRECT?;a. The present value of ORD must exceed the;present value of DUE, but the future value of ORD may be less than the future;value of DUE.;b. The present value of DUE exceeds the;present value of ORD, while the future value of DUE is less than the future;value of ORD.;c. The present value of ORD exceeds the;present value of DUE, and the future value of ORD also exceeds the future value;of DUE.;d. The present value of DUE exceeds the;present value of ORD, and the future value of DUE also exceeds the future value;of ORD.;e. If the going rate of interest decreases;from 10% to 0%, the difference between the present value of ORD and the present;value of DUE would remain constant.;22. You are considering two equally risky annuities, each of;which pays $5,000 per year for 10 years.;Investment ORD is an ordinary (or deferred) annuity, while Investment;DUE is an annuity due. Which of the;following statements is CORRECT?;a. A rational investor would be willing to pay;more for DUE than for ORD, so their market prices should differ.;b. The present value of DUE exceeds the;present value of ORD, while the future value of DUE is less than the future;value of ORD.;c. The present value of ORD exceeds the;present value of DUE, and the future value of ORD also exceeds the future value;of DUE.;d. The present value of ORD exceeds the;present value of DUE, while the future value of DUE exceeds the future value of;ORD.;e. If the going rate of interest decreases;from 10% to 0%, the difference between the present value of ORD and the present;value of DUE would remain constant.;23. You have a chance to buy an annuity that pays $550 at the beginning;of each year for 3 years. You could earn;5.5% on your money in other investments with equal risk. What is the most you should pay for the;annuity?;a. $1,412.84;b. $1,487.20;c. $1,565.48;d. $1,643.75;e. $1,725.94;24. You have a chance to buy an annuity that pays $5,000 at the;beginning of each year for 5 years.;You could earn 4.5% on your money in other investments with equal;risk. What is the most you should pay;for the annuity?;a 20,701;b. $21,791;c. $22,938;d. $24,085;e. $25,289;25. Your uncle is about to retire, and he;wants to buy an annuity that will provide him with $75,000 of income a year for;20 years, with the first payment coming immediately. The going rate on such annuities is;5.25%. How much would it cost him to buy;the annuity today?;a. $825,835;b. $869,300;c. $915,052;d. $963,213;e. $1,011,374;26. Your father is about to retire, and he wants to buy an;annuity that will provide him with $85,000 of income a year for 25 years, with;the first payment coming immediately.;The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity;today?;a. $1,063,968;b. $1,119,966;c. $1,178,912;d. $1,240,960;e. $1,303,008;27. You inherited an oil well that will pay you $25,000 per;year for 25 years, with the first payment being made today. If you think a fair return on the well is;7.5%, how much should you ask for it if you decide to sell it?;a. $284,595;b. $299,574;c. $314,553;d. $330,281;e. $346,795;28. Sam was injured in an accident, and the insurance company;has offered him the choice of $25,000 per year for 15 years, with the first;payment being made today, or a lump sum.;If a fair return is 7.5%, how large must the lump sum be to leave him as;well off financially as with the annuity?;a. $225,367;b. $237,229;c. $249,090;d. $261,545;e. $274,622;29. What?s the present value of a 4-year ordinary annuity of;$2,250 per year plus an additional $3,000 at the end of Year 4 if the interest;rate is 5%?;a. $8,509;b. $8,957;c. $9,428;d. $9,924;e. $10,446;30. Suppose you inherited $275,000 and invested it at 8.25% per;year. How much could you withdraw at the;end of each of the next 20 years?;a. $28,532;b. $29,959;c. $31,457;d. $33,030;e. $34,681

Paper#51048 | Written in 18-Jul-2015

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