1. A rich relative has bequeathed you a growing perpetuity.

The first payment will occur in a year and will be $3,000. Each
year after that, you will receive a payment on the anniversary of the last payment that is 5% larger than the last
payment. This pattern of payments will go on forever. Assume that the interest rate is 10% per year.
a. What is today's value of the bequest?
b. What is the value of the bequest immediately after the first payment is made?

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a. What is today's value of the bequest?

Today's value of the bequest is $ . (Round to the nearest dollar.)

b. What is the value of the bequest immediately after the first payment is made?

The value of the bequest immediately after the first payment is made is $ . (Round to the nearest
dollar.)

2. You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will
lend you the money, and you will repay the loan by making the same payment every two years for the next 20 years
(i.e., a total of 10 payments). If the interest rate is 6% per year, how much will you have to pay every two years?

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Every two years the payment is $ . (Round to the nearest dollar.)

3. You figure that the total cost of college will be $108,000 per year 18 years from today. If your discount rate is
4% compounded annually, what is the present value today of four years of college costs starting 18 years from today?

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The present value today of four years of college costs starting 18 years from today is $ . (Round to the
nearest dollar.)
4. Assume you can earn 8.5% per year on your investments.
a. If you invest $140,000 for retirement at age 30, how much will you have 35 years later for retirement?
b. If you wait until age 40 to invest the $140,000, how much will you have 25 years later for retirement?
c. Why is the difference so large?

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a. If you invest $140,000 for retirement at age 30, how much will you have 35 years later for retirement?

The future value is $ . (Round to the nearest dollar.)

b. If you wait until age 40 to invest the $140,000, how much will you have 25 years later for retirement?

The future value is $ . (Round to the nearest dollar.)

c. Why is the difference so large?

(Select from the drop-down menu.)

The difference is large because the compounding effect is accentuated the (1) the time of investment.

(1) shorter
longer

5. When Alfred Nobel died, he left the majority of his estate to fund five prizes, each to be awarded annually in perpetuity
starting one year after he died (the sixth one, in economics, was added later).
a. If he wanted the cash award of each of the five prizes to be $55,000 and his estate could earn 9% per year, how
much would he need to fund his prizes?
b. If he wanted the value of each prize to grow by 6% per year (perhaps to keep up with inflation), how much would he
need to leave? Assume that the first amount was still $55,000.
c. His heirs were surprised by his will and fought it. If they had been able to keep the amount of money you calculated
in
(b), and had invested it at 9% per year, how much would they have in 2014, 118 years after his death?

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a. If he wanted the cash award of each of the five prizes to be $55,000 and his estate could earn 9% per year, how
much would he need to fund his prizes?

To fund the five prizes, he would need $ . (Round to the nearest dollar.)

b. If he wanted the value of each prize to grow by 6% per year (perhaps to keep up with inflation), how much would he
need to leave? Assume that the first amount was still $55,000.

He would need to leave $ . (Round to the nearest dollar.)

c. His heirs were surprised by his will and fought it. If they had been able to keep the amount of money you calculated
in
(b), and had invested it at 9% per year, how much would they have in 2014, 118 years after his death?

In 2014, 118 years after his death, his heirs would have $ million. (Round to the nearest million
dollar.)
6. A rich aunt has promised you $2,000 one year from today. In addition, each year after that, she has promised you a
payment (on the anniversary of the last payment) that is 2% larger than the last payment. She will continue to show this
generosity for 20 years, giving a total of 20 payments. If the interest rate is 9%, what is her promise worth today?

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The present value of the aunt's promise is $ .

(Round to the nearest dollar.)

7. Assume that your parents wanted to have $180,000 saved for college by your 18th birthday and they started saving on
your first birthday. They saved the same amount each year on your birthday and earned 6.0% per year on their
investments.
a. How much would they have to save each year to reach their goal?
b. If they think you will take five years instead of four to graduate and decide to have $220,000 saved just in case, how
much would they have to save each year to reach their new goal?

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a. How much would they have to save each year to reach their goal?

To reach the goal of $180,000, the amount they have to save each year is $ . (Round to the nearest
cent.)

b. If they think you will take five years instead of four to graduate and decide to have $220,000 saved just in case, how
much would they have to save each year to reach their new goal?

To reach the goal of $220,000, the amount they have to save each year is $ . (Round to the nearest
cent.)

8. What is the present value of $9,000 paid at the end of each of the next 74 years if the interest rate is 10% per year?

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The present value is $ . (Round to the nearest cent.)

9. You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an
interest rate of 8%. If the bond initially costs $4,000, what is the payment every year?

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The payment at the end of each year is $ . (Round to the nearest dollar.)
10. You want to endow a scholarship that will pay $7,000 per year forever, starting one year from now. If the school's
endowment discount rate is 9%, what amount must you donate to endow the scholarship? How would your answer
change if you endow it now, but it makes the first award to a student 10 years from today?

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In the first case, the amount you must donate today is $ . (Round to the nearest cent.)

How would your answer change if you endow it now, but it makes the first award to a student 10 years from today?

In this case, the amount you must donate today is $ . (Round to the nearest cent.)

11. You plan to deposit $700 in a bank account now and $200 at the end of the year. If the account earns 6% interest per
year, what will be the balance in the account right after you make the second deposit?

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The balance in the account right after you make the second deposit will be $ . (Round to the nearest
dollar.)
12. You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $6,200. You plan to
put down $1,200 and borrow $5,000. You will need to make annual payments of $1,100 at the end of each year. Show
the timeline of the loan from your perspective. How would the timeline differ if you created it from the bank's
perspective?

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Show the timeline of the loan from your perspective.

(Select the best choice below.)

A. Year 0 1 2 3 4 5

Cash Flow $1,200 $1,100 $1,100 $1,100 $1,100 $1,100

B. Year 0 1 2 3 4 5

Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

C. Year 0 1 2 3 4 5

Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

D. Year 0 1 2 3 4 5

Cash Flow $6,200 $1,100 $1,100 $1,100 $1,100 $1,100

How would the timeline differ if you created it from the bank's perspective? (Select the best choice below.)

A. Year 0 1 2 3 4 5

Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

B. Year 0 1 2 3 4 5

Cash Flow $1,200 $1,100 $1,100 $1,100 $1,100 $1,100

C. Year 0 1 2 3 4 5

Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

D. Year 0 1 2 3 4 5

Cash Flow $6,200 $1,100 $1,100 $1,100 $1,100 $1,100

13. Suppose you receive $130 at the end of each year for the next three years.
a. If the interest rate is 6%, what is the present value of these cash flows?
b. What is the future value in three years of the present value you computed in (a)?
c. Suppose you deposit the cash flows in a bank account that pays 6% interest per year. What is the balance in the
account at the end of each of the next three years (after your deposit is made)? How does the final bank balance
compare with your answer in (b)?

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a. If the interest rate is 6%, what is the present value of these cash flows?

The present value of these cash flows is $ . (Round to the nearest cent.)

b. What is the future value in three years of the present value you computed in (a)?

The future value in three years is $ . (Round to the nearest cent.)

c. Suppose you deposit the cash flows in a bank account that pays 6% interest per year. What is the balance in the
account at the end of each of the next three years (after your deposit is made)?

The balance in the account at the end of year one is $ . (Round to the nearest cent.)

The balance in the account at the end of year two is $ . (Round to the nearest cent.)

The balance in the account at the end of year three is $ . (Round to the nearest cent.)

How does the final bank balance compare with your answer in (b)? (Select from the drop-down menu and ignore
small differences due to rounding.)

The final bank balance in (c) is (1) the bank balance from part (b).

(1) lower than

equal to
higher than
14. You have an investment account that started with $3,000 10 years ago and which now has grown to $5,000.
a. What annual rate of return have you earned (you have made no additional contributions to the account)?
b. If the investment account earns 13% per year from now on, what will the account's value be 10 years from now?

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a. What annual rate of return have you earned (you have made no additional contributions to the account)?

Your annual rate of return is %. (Round to two decimal places.)

b. If the savings bond earns 13% per year from now on, what will the account's value be 10 years from now?

The account's value in ten years will be $ . (Round to the nearest cent.)
1. 60,000

63,000

2. 8,980

3. 201,257

4. 2,433,150

1,076,147

(1) longer

5. 3,055,556

9,166,667

239,077

6. 20,996

7. 5,824.11

7,118.36

8. 89,922.16

9. 320

10. 77,777.78

35,811.05

11. 942
12. Year 0 1 2 3 4 5

C. Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

Year 0 1 2 3 4 5

C. Cash Flow $5,000 $1,100 $1,100 $1,100 $1,100 $1,100

13. 347.49

413.87

130.00

267.80

413.87
(1) equal to

14. 5.24

16,972.84