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Answer the questions and Identify the table that should be used for each of the following...

Answer the questions and Identify the table that should be used for each of the following situations in the space provided, then show the calculations to solve the problem below.

FV – Future Value of 1

PV – Present Value of 1

FVA – Future Value of an Annuity

PVA – Present Value of an Annuity

__________ 5. An investment firm has determined that the market price of a 5-year $100,000 bond yielding 6% is $104,212. This is based on the $100,000 face amount of the bond that the investor will receive when the bond matures and the $7,000 annual interest the bond will pay until that time. (Hint: There are two tables.)

_________ 6.     Matt is receiving an annuity of $8,500 a year from his dad’s estate. There are 12 years of payments left. ABC Company has offered him $60,000 now in exchange for the future payments. His investment account is returning 7%. Should he take the offer?

Identify the table that should be used for each of the following situations in the space provided, then show the calculations to solve the problem below.

FV – Future Value of 1

PV – Present Value of 1

FVA – Future Value of an Annuity

PVA – Present Value of an Annuity

_________ 1.     Tom bought a zero-coupon bond with an 8% yield. (A zero-coupon bond does not pay interest, but the value of the bond grows throughout its life.) When it matures in 20 years, he will receive $200,000. How much did Tom pay for the bond?

_________ 2.     You have determined that getting your degree will result in you earning an additional $5,000 per year. If you work 23 more years and save those additional earnings at 3% per year, what will be the additional value of having the degree?

_________ 3.     The IRS audited Eric’s return from three years ago, and determined that he owed $10,000 at that time, but the IRS also charges 7% interest per year on back taxes. How much does Eric owe the IRS?

_________ 4.     Will bought his first car 24 years ago for $6,000. He wants to buy a comparable car for his son. If inflation has run about 3% a year since then, how much can Will expect to pay for his son’s car?

Solutions

Expert Solution

1.     Tom bought a zero-coupon bond with an 8% yield. (A zero-coupon bond does not pay interest, but the value of the bond grows throughout its life.) When it matures in 20 years, he will receive $200,000. How much did Tom pay for the bond?
Table used - PV – Present Value of 1
Period (n ) 20
Rate ( i) 8%
Current Price = $200,000 x PV(8%,20) $4,291
2. You have determined that getting your degree will result in you earning an additional $5,000 per year. If you work 23 more years and save those additional earnings at 3% per year, what will be the additional value of having the degree?
Table Used - FVA – Future Value of an Annuity
Period (n ) 23
Rate ( i) 3%
Future Price of Annuity  = $5000 x FVA(3%,23) $162,264
3.     The IRS audited Eric’s return from three years ago, and determined that he owed $10,000 at that time, but the IRS also charges 7% interest per year on back taxes. How much does Eric owe the IRS?
Table used - Future Value of 1
Period (n ) 3
Rate ( i) 7%
Future Value = 10000 x FV(7%,3) $12,250
4.     Will bought his first car 24 years ago for $6,000. He wants to buy a comparable car for his son. If inflation has run about 3% a year since then, how much can Will expect to pay for his son’s car?
Table used - Future Value of 1
Period (n ) 24
Rate ( i) 3%
Future Value = 6000 x FV(3%,24) $12,197
5. An investment firm has determined that the market price of a 5-year $100,000 bond yielding 6% is $104,212. This is based on the $100,000 face amount of the bond that the investor will receive when the bond matures and the $7,000 annual interest the bond will pay until that time. (Hint: There are two tables.)
Table used - PV – Present Value of 1 and PVA – Present Value of an Annuity
Period (n ) 5
Rate ( i) 6%
PV of Bonds  = $100,000 x PV(6%,5) $74,725.82
PV of interest  = $7000 x PVA(6%,5) $29,486.55
Current Price of Bond $104,212
6.     Matt is receiving an annuity of $8,500 a year from his dad’s estate. There are 12 years of payments left. ABC Company has offered him $60,000 now in exchange for the future payments. His investment account is returning 7%. Should he take the offer?
Table used - PVA – Present Value of an Annuity
Period (n ) 12
Rate ( i) 7%
PVA  = $8500 x PVA(7%,12) $67,513
He should not take the offer because PV of annuity $8500 is more than the $60,000

ekkarill92 answered 1 year ago
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