ASSIGNMENT 2

INTRODUCTION TO FINANCIAL MATHEMATICS

1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account
that pays an annual interest rate of 14%?
2. What will $247,000 grow to be in 9 years if it is invested today in an account with an annual
interest rate of 11%?
3. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an account
with an annual interest rate of 8%?
4. At what annual interest rate must $137,000 be invested so that it will grow to be $475,000 in 14
years?
5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an account
that pays a quoted annual interest rate of 13% with semi-annual compounding of interest?
6. What will $153,000 grow to be in 13 years if it is invested today in an account with a quoted
annual interest rate of 10% with monthly compounding of interest?
7. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an account
with a quoted annual interest rate of 8% with monthly compounding of interest?
8. At what quoted annual interest rate must $134,000 be invested so that it will grow to be $459,000
in 15 years if interest is compounded weekly?
9. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of interest. What is your effective annual interest rate?
10. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment will
occur one year from today). If you feel that the appropriate discount rate is 13%, what is the annuity
worth to you today?
11. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each year) in
an account that pays an annual interest rate of 14%, what will your account be worth at the end of
12 years?
12. You plan to borrow $389,000 now and repay it in 25 equal annual installments (payments will
be made at the end of each year). If the annual interest rate is 14%, how much will your annual
payments be?
13. You are told that if you invest $11,000 per year for 23 years (all payments made at the end of
each year) you will have accumulated $366,000 at the end of the period. What annual rate of return
is the investment offering?
14. You are offered an annuity that will pay $17,000 per year for 7 years (the first payment will be
made today). If you feel that the appropriate discount rate is 11%, what is the annuity worth to you
today?
15. If you deposit $15,000 per year for 9 years (each deposit is made at the beginning of each year)
in an account that pays an annual interest rate of 8%, what will your account be worth at the end
of 9 years?
16. You plan to accumulate $450,000 over a period of 12 years by making equal annual deposits
in an account that pays an annual interest rate of 9% (assume all payments will occur at the
beginning of each year). What amount must you deposit each year to reach your goal? 105
17. You are told that if you invest $11,100 per year for 19 years (all payments made at the
beginning of each year) you will have accumulated $375,000 at the end of the period. What annual
rate of return is the investment offering?
18. The Weidmans want to save $40,000 in 2 years for a down payment on a house. If they make
monthly deposits in an account paying 12%, compounded monthly, what is the size of the
payments that are required to meet their goal?

19. Find the future value of an annuity due of $100 each quarter for 212 years at 12%, compounded
quarterly.

20. Find the future value of an annuity due of $200 paid at the beginning of each 6-month period
for 8 years if the interest rate is 6%, compounded semiannually.

21. How much must be deposited at the beginning of each year in an account that pays 8%,
compounded annually, so that the account will contain $24,000 at the end of 5 years?

22. A couple has determined that they need $300,000 to establish an annuity when they retire in
25 years. How much money should they deposit at the end of each month in an investment plan
that pays 10%, compounded monthly, so they will have the $300,000 in 25 years?

23. Grandparents plan to open an account on their grandchild’s birthday and contribute each month
until she goes to college. How much must they contribute at the beginning of each month in an
investment that pays 12%, compounded monthly, if they want the balance to be $180,000 at the
end of 18 years?

24. Find the present value of an annuity of $2000 per year at the end of each of 8 years after being
deferred for 6 years, if money is worth 7% compounded annually.

25. The terms of a single parent’s will indicate that a child will receive an ordinary annuity of
$16,000 per year from age 18 to age 24 (so the child can attend college) and that the balance of
the estate goes to a niece. If the parent dies on the child’s 14th birthday, how much money must
be removed from the estate to purchase the annuity? (Assume an interest rate of 6%, compounded
annually.)

26. Danny Metzger’s parents invested $1600 when he was born. This money is to be used for
Danny’s college education and is to be withdrawn in four equal annual payments beginning when
Danny is age 19. Find the amount that will be available each year, if money is worth 6%,
compounded annually.

27. You have just won the Georgia Lottery with a jackpot of $11,000,000. Your winnings will be
paid to you in 26 equal annual installments with the first payment made immediately. If you had
the money now, you could invest it in an account with a quoted annual interest rate of 9% with
monthly compounding of interest. What is the present value of the stream of payments you will
receive?

28. You are planning for retirement 34 years from now. You plan to invest $4,200 per year for the
first 7 years, $6,900 per year for the next 11 years, and $14,500 per year for the following 16 years
(assume all cash flows occur at the end of each year). If you believe you will earn an effective
annual rate of return of 9.7%, what will your retirement investment be worth 34 years from now?

29. You plan to retire 33 years from now. You expect that you will live 27 years after retiring. You
want to have enough money upon reaching retirement age to withdraw $180,000 from the account
at the beginning of each year you expect to live, and yet still have $2,500,000 left in the account
at the time of your expected death (60 years from now). You plan to accumulate the retirement
fund by making equal annual deposits at the end of each year for the next 33 years. You expect
that you will be able to earn 12% per year on your deposits. However, you only expect to earn 6%
per year on your investment after you retire since you will choose to place the money in less risky
investments. What equal annual deposits must you make each year to reach your retirement goal?

Answer:
1. $25,489.71
2. $631,835.12
3. 16.06 years
4. 9.29%
5. $104,947.03
6. $558,386.38
7. 12.97 years
8. 8.21%
9. 13.65%
10. $136,486.59
11. $436,331.98
12. $56,598.88
13. 3.21%
14. $88,919.14
15. $202,298.44
16. $20,497.98
17. 5.48%
18. $1482.94
19. $1180.78
20. $4152.32
21. $3787.92
22. $266.10
23. $235.16
24. $7957.86
25. $74,993.20
26. $1317.98
27. $4,453,789.97
28. $1,542,217.26
29. $8,874.79