### Financial Literacy: Future Value and Annuities#### 10. Future Value of Kristine's AccountKristine has $5,000 in an account today with a 3% interest rate. Two years from now, she withdraws $1,000 to buy a laptop. Calculate her account balance after six years, assuming no other transactions and annual compounding.1. $4,844.752. $7,095.773. $4,716.214. $7,164.315. $4,970.26#### 11. Cost of an Annuity for Living ExpensesYour grandaunt wants an ordinary annuity to cover $70,000 per year in living costs for 20 years. With a 5% interest rate compounded monthly, how much will the annuity cost?1. $872,354.722. $865,404.523. $883,897.664. $863,824.15#### 12. Mortgage CalculationAfter graduation, you plan to put $1,000 monthly towards housing. With a 4% interest rate for a 30-year mortgage, calculate:**a. Maximum Borrowing Amount:** i. $209,461.24 ii. $207,504.40 iii. $694,049.40 iv. $24,999.98 **b. Mortgage Buyout After Relocation:** Your company relocates you after 8 years. Determine the bank payoff to clear the loan: i. $207,018.52 ii. $175,382.89 iii. $113,461.24 iv. $153,604.91 **c. Tax-Deductible Mortgage Interest for Year 8:** i. $12,000.00 ii. $7,121.66 iii. $4,878.34 iv. $7,210.45 #### 13. Annuity Options for Grandfather's RetirementYour grandfather wants to convert $825,000 into an annuity lasting 15 years. He has three options. Which should he choose and why?1. Quarterly ordinary annuity of $24,300.2. Monthly ordinary annuity of $8,050.3. Monthly annuity due of ## Scenario Analysis and True/False Questions on Interest Rates### 14. Directional Changes Based on Interest Rate VariationsFor each of these scenarios, consider how the specified variable changes when the interest rate goes up:a. If interest rate goes up and you have a set monthly budget for mortgage payments, you can afford a **bigger/smaller** house.b. You found your dream home. If interest rate goes up, your monthly payment goes **up/down**.c. If interest rate goes up, the money you have in your savings account will be worth **more/less** in the future.d. If interest rate goes up, you’d have to save **more/less** per month in order to buy a car worth $20,000 in 3 years.e. If interest rate goes up, you’ll be able to withdraw **more/less** money per month for a fixed number of months.f. You gave $100,000 to the university for scholarships. If interest rate goes up, the university would be able to offer **more/less** scholarship.g. You have a fixed monthly dollar amount that you’d like to use in your retirement 45 years from now. If interest rate goes up, you will have to save **more/less** per month today.h. Joe has saved $1 million and decides to retire today. He is more certain that he has enough to spend in his retirement if interest rate goes **up/down**.i. You win $5 million in lottery today, and the lottery commission is offering you $250K every year for 20 years or a $3 million lump sum today. You are **more/less** likely to take the lump sum if market interest rates go up.j. If the cost of an annuity just went up, that means the interest rate must have gone **up/down**.### 15. True or False StatementsMark True or False for the following:T / F a. If a borrower pays twice as much as the required payments every period, she can pay off the loan in half the time.T / F b. If the interest rate drops by 50%, the monthly payments of a mortgage would drop by 50%.T / F c. Compared to the nominal rate, the EAR is a better measure of true cost of borrowing.T / F d. The cost of an annuity due is always higher than

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10. Kristine has $5,000 in an account today that pays 3% interest rate. Two years from now she withdraws $1,000 from that account to buy a laptop. How much will she have in this account in 6 years if she does not make any other deposits or withdrawals? Assume annual compounding. a. $4,844.75 b. $7,095.77 c. $4,776.21 d. $7,164.31 e. $4,970.26 11. Your grandaunt wants to buy an (ordinary) annuity that will pay her cost of living of $70,000 per year for 20 years. If the quoted interest rate today is 5% and the annuity compounds monthly, how much does this annuity cost? a. $872,354.72 b. $865,404.52 c. $883,897.66 d. $863,824.15 12. After graduation, you get a great job. You budget $1,000 per month towards housing. You'd like to buy a house. Assume that the interest rate = 4% for a 30-year mortgage. a. How much can you borrow? i. $209,461.24 ii. $207,504.40 iii. $694,049.40 iv. $24,999.98 b. Eight years into the mortgage, your company decides to relocate you to Hawaii. How much must you pay the bank to pay off your mortgage? (What is the balance left on the loan?) i. $207,018.52 ii. $175,382.89 iii. $113,461.24 iv. $153,604.91 c. Interest paid on mortgages are tax deductible. What is the interest you paid in year 8? i. $12,000.00 ii. $7,121.66 iii. $4,878.34 iv. $7,210.45 13. Your grandfather just retired and has $825,000 that he'd like to turn into an annuity. He is considering three different annuity options. He's planning to have the annuity last him 15 years. Which option should he pick and why? a. Quarterly ordinary annuity of $24,300. b. Monthly ordinary annuity of $8,050. c. Monthly annuity due of $8,000.

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS