46 problems (Chapters 4, 5, 10, 11)

Chapter 4

PROBLEMS (p. 129)

1. An ATM service fee of $2 is used by a person 100 times in a year. What would be the future value in 10 years (use a 4 percent rate) of the annual amount paid in ATM fees?

$2,401.12 = $200 x 12.006

2. What might be a savings goal for a person who buys a five-year CD paying 4.67 percent instead of an 18-month savings certificate paying 3.29 percent?

A person saving for a longer-term goal such as children’s education, retirement, or purchase of a vacation home may make use of a five-year savings certificate. A person who will need the funds in less than two years would use an 18-month savings certificate. Also, if you believe interest rates will be dropping, use of a long-term certificate will guarantee a higher savings rate over this time period.

3. For each of these situations, determine the savings amount. Use the time value of money tables in Chapter 1 (Exhibit 1-3) or in the Chapter 1 Appendix.

a. What would be the value of a savings account started with $500, earning 6 percent (compounded annually) after 10 years?

$500 [pic] 1.791 = $895.50

b. Brenda Young desires to have $10,000 eight years from now for her daughter’s college fund. If she will earn 7 percent (compounded annually) on her money, what amount should she deposit now? Use the present value of a single amount calculation.

$10,000 [pic] 0.582 = $5,820

c. What amount would you have if you deposited $1,500 a year for 30 years at 8 percent (compounded annually)?

$1,500 [pic] 113.28 = $169,920

4. What would be the annual percentage yield for a savings account that earned $56 in interest on $800 over the past 365 days?

$56 / $800 = .07 = 7 percent

5. With a 28 percent marginal tax rate, would a tax-free yield of 7 percent or a taxable yield of 9.5 percent give you a better