Read Chapter 1, “An Introduction to Basic Finance,” and

Chapter 7, “The

Time Value of Money.”

Assignment Problems

Do Problems 1, 2, 3, 5, 6, 7, 12, and 13 on pages 128–130 of

the textbook.

Submit your answers to these problems as Written Assignment

1 (consult the Course Calendar for the

assignment due date). To receive full credit for your answers, you must show all work and

include complete solutions.

1. You invest $1,000 in a certificate of deposit that

matures after 10 years and pays 5 percent interest, which is compounded

annually until the certificate matures.

a. How much interest will you earn if the interest is left

to accumulate?

b. How much interest will you earn if the interest is

withdrawn each year?

c. Why are the answers to a and b different?

2. A self-employed

person deposits $3,000 annually in a retirement account (called a Keogh account) that earns 8 percent.

a. How much will be in the account when the individual

retires at the age of 65 if the savings program starts when the person is age

40?

b. How much additional money will be in the account if the

saver defers retirement until age 70 and continues the contributions?

c. How much additional money will be in the account if the

saver discontinues the contributions at age 65 but does not retire until age

70?

3. A 45-year-old

woman decides to put funds into a retirement plan. She can save $2,000 a year and earn 9 percent on

this savings. How much will she have

accumulated if she retires at age 65? At retirement how much can she withdraw

each year for 20 years from the accumulated savings if the savings continue to

earn 9 percent?

5. If a parent wants to have $100,000 to send a newborn

child to college, how much must be invested annually for 18 years if the funds

earn 9 percent? (Any current student who subsequently becomes a parent and wants

to send a child to college should make this calculation early in the child’s

life.)

6. A widow currently

has a $93,000 investment yielding 9 percent annually. Can she withdraw $16,000 a year for the next

10 years?

7. An investment

generates $10,000 per year for 25 years. If you can earn 10 percent on other investments, what is the

current value of this investment? If its current price is $120,000, should you

buy it?

12. You are 25 years old and inherit $65,000 from your

grandmother. If you wish to purchase a $100,000 boat to celebrate your 30th

birthday, what compound annual rate of

return must you earn?

13. An investment

offers to pay you $10,000 a year for five years. If it costs $33,520, what will be your rate of return on

the investment?