Quiz accounting and finance

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(a)	What is the present value of $20 000 to be received 8 years from now and discounted back to the present at 10% compounded monthly?

(b)	How many years will it take for an investment of $1200 to grow to $8500 if it is invested at 9% compounded quarterly?

(d)	(i)  At what nominal interest rate, compounded quarterly, will money double itself in 10 years?

(ii)  What effective annual interest rate would bring about this result?

(e)	(i) How much will I have at the end of 5 years if I have $1500 invested at a  simple interest rate of 7%?

(ii) Briefly explain the distinction between simple and compound interest.

(f)	Which option should you choose if your discount rate is 6% (Show all working)

Option 1: $5,000 now and $10,000 in 5 years time.

Option 2: $14,000 in 4 years time.
Question 2: (10 marks)

Congratulations! You just won the lottery. You are offered the choice of any ONE of the following prizes. Which should you choose if your discount rate is 8% and WHY? (Show all working.)

(a)	$10,000 at the end of each of the next 10 years.

(b)  $14,000 per year for 10 years, with the first payment made 5 years from 
	       today.   
       
(c)	$5,500 per year forever, beginning one year from today.

(d)  $20,000 now, $20,000 2 years from now, and $20,000 5 years from now.

Question 3: (5 marks)

On 1st July 1998 MBS Company issued 1 000 ten year bond with a face value of $10 000 each. The coupon rate was 10% and the risk adjusted required rate of return at the time of sale was 9%. Interest payments are to be paid each first of July. An original investor who bought ten bonds now needs money and is going to sell the bond on 2nd July 2002. At the time of resale, other 2001 new issue bonds will be offering a 7% coupon rate and the risk adjusted required rate of return is expected to be 8%.

What is the resale value of MBS Company bonds to the original investor?

(HINT: only use the information you need).

Question 4: (5 marks)

$275,000 is borrowed to purchase a block of land. If it is to be repaid with monthly repayments at 6% interest over 25 years, how much interest is paid over the life of the loan?

Question 5: (5 marks)

Your grandfather is concerned about your college expenses. This morning, for your birthday, he gave you a cheque for $5 000 and told you that you would receive a cheque for $5 000 for each of the next 6 years on your birthday. You immediately place the first $5 000 in an investment which will earn 12% compounded semi annually. The other six cheques of $5 000 each will also be invested at 12% compounded semi annually immediately on receipt. How much money will you have when you enter college 7 years from today and assuming the money in the investment is never withdrawn?