Sample Questions on finance annuity (PMT)
SHORT ANSWER QUESTIONS:
1) Your friend is celebrating his 35th birthday today and wants to start saving for his anticipated retirement at age 65. He wants to be able to withdraw $10,000 from his savings account on each birthday for 10 years following his retirement; the first withdrawal will be on his 66th birthday. Your friend intends to invest his money in the local savings bank, which offers 8 per cent interest per year. He wants to make equal, annual payments on each birthday in a new savings account he will establish for his retirement fund.
Required:
a) If he starts making these deposits on his 36th birthday and continues to make deposits until he is 65 (the last deposit will be on his 65th birthday), what amount must he deposit annually to be able to make the desired withdrawals on retirement?
b) Suppose your friend has just inherited a large sum of money. Rather than making equal payments, he has decided to make one lump sum payment on his 36th birthday to cover his retirement needs. What amount would he have to deposit?
2) A well-known insurance company offers a policy known as the ‘estate creator six pay’. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows:
The purchaser (say, the parent) makes the following six payments to the insurance company:
1st birthday $730 4th birthday $855
2nd birthday $730 5th birthday $855
3rd birthday $730 6th birthday $855
After the child’s 6th birthday, no more payments are made. When the child reaches age 65, he or she receives $143,723. If the relevant interest rate is 6 percent for the first 6 years and 7 per cent for all subsequent years, is the policy worth buying?
3) Mark, a naive business student, is considering an offer from Company A calling for 20 payments of $10,000. The first payment will be 15 years from today. Owing to an unexpected strike, the payment 17 years from today will be skipped; however, $20,000 will be paid 18 years from today to make up for the skipped year. No other gap in yearly payments will be allowed. Discounting at 10%, Mark wants to know the present value of the series of payments.
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