Case 1 Essay

2152 Words Mar 1st, 2013 9 Pages
1. Consider a 1-Year $10,000 CD

A. The future value of a $10,000 CD that has a maturity of 1 year at maturity with 10% interest is $11,000. Financial Calculator Inputs: $ -10,000=PV, 1=N, I=10, FV=? ($11,000) B. The future value of a 1-year, $10,000 CD after one year at an interest rate of 5.0% is $10,500. Financial Calculator Inputs: $-10,000=PV, 1=N, 5=I, FV=? ($10,500) The future value of a 1-year, $10,000 CD after one year at an interest rate of 15.0% is $11,500. Financial Calculator Inputs: $-10,000=PV, 1-N, 15=I, FV=? ($11,500) C. The effective annual rate of First National Bank’s CD offering a 10% nominal interest rate compounded semiannually is 10.25%.

Calculations: (1+.10/2)^2 -1
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Calculations: Interest =(10/2)=5 $1,000*{[(1.05^10)-1]/.05}= $12,577.89

5. Now Assume payments are made at the beginning of each period. There are 5 annual payments of $2,000 each.

A. The type of annuity in which payments are made at the beginning of each period is known as an Annuity Due (Annuity in Advance) B. The future value of an Annuity Due of payments of $2,000 for 5 years paying interest of 10% annually is $13,431.22 Financial Calculator Inputs: BEGIN, 10=I, $-2000=PMT, 5=N, $0=PV, FV=? ($13,431.22) C. The future value of an Annuity Due with payments of $2,000 invested for five years at the First National Bank at 10% interest compounded semiannually is $13,528.90

Calculations: EAR=(1+.10/2)^2 –1 =.1025

Financial Calculator Inputs: BEGIN, 10.25=I, 5=N,$ -2000=PMT, $0=PV, FV=? ($13,528.90) D. At an interest rate of 10% under annual compounding for 5 years, a payment Of $2,978.14 each year for 5 years is needed to accumulate $20,000. Financial Calculator Inputs: BEGIN, PV=$0, FV=$20,000, 10=I, 5=N, PMT=? ($-2,978.13)

E. A lump sum of $8,339.73 would need to be deposited today to accumulate

$13,431.22 after 5 years at 10% interest

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