Iqra University, Karachi

• FIN 311

• 1. Your grandfather has offered you a choice of one of the three alternatives: $ 5,000 now; $ 1,000 a year for eight years; or $12,000 at the end of eight years, assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative? 2. You need $30,750 at the end of eight years, and your only investment outlet is a 12 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. a. What single payment could be made at the beginning of the first year to achieve this objective? b. What amount could you pay at the end of each year annually for eight years to achieve this same objective? 3. On January 1, 1985, Mr. Strong bought 100 shares of stock for $13 per share. On December 31, 1987, he sold the stock for $20.50 per share. What is his annual rate of return? Interpolate to find the exact answer. 4. Dr. Emily Smart bought 1,000 shares of Quality steel products stock for $5 per share on January 1, 1982. Using interpolation, find her exact annual rate return if she sells the stock: a. On December 31, 1983, for $6 per share. b. On December 31, 1986, for $7.85 per share c. On December 31, 1989, for $11 per share. 5. Dr. John Foresight has just invested $2,790 for his son (age one). This money will be used for his son’s education 17 years from now. He calculates that he will need $30,000 for his son’s education by the time the boy goes to school. What rate of return will Mr. Foresight need in on to achieve this goal? 6. Donald Johnson has just given an insurance company $20,000. In return, he will receive an annuity of $1,800 for 20 years. At what rate of return must the insurance company invest this $20,000 in order to make the annual payments? Interpolate. 7. Brain Hirt stared a paper route on January 1, 1980. Every three months, he deposits $250 in his bank account, which earns 8 percent annually but is compounded quarterly. On December 31, 1984, he used the entire balance in his bank account to invest in a certificate of deposit at 12 percent annually. How much will he have on December 31, 1987