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Question(s) / Instruction(s):

1.            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.

 

 

2.            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.

 

 

3.            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

 

 

4.            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

 

 

5.            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

 

 

6.            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

 

 

7.            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

 

 

8.            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

9.            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

 

 

10.          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

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