Latest Revision: December 1996.
1. Upon graduation from The Fuqua School of Business,
you receive a $20,000 signing bonus from your new company, which you decide
to invest for two years. Your investment advisor suggests two alternative
strategies, which both require a commitment for the full two years. The
first alternative will earn 10% per year for both years. The second alternative
earns 12% for the first year, and 8% for the second year. Which should
you choose? Assume that interest compounds annually.
2. You just discovered that your grandmother put $5,000 in a
trust fund for you twenty years ago. It earned a nominal interest rate
of 8% per year, compounding quarterly. How much is it worth now?
3. The United States Treasury offers to pay you $100,000 in exactly
ten years if you will lend them money now. If the appropriate nominal interest
rate is 6% per year with semiannual compounding, how much should you pay
4. You are considering two investments. The first pays $50,000
in seven years. The second investment pays $25,000 in six years and another
$25,000 at the end of the eighth year. The appropriate effective annual
interest rate is 7% for both investments. Which investment is worth more?
It doesn't matter.
Both strategies pay $50,000.
The first investment
which pays $50,000 in seven years is worth more.
The second strategy with
$25,000 payments after six and eight years is worth more.
More information is needed
to determine the answer.
5. Twenty years after graduating from Fuqua, you sell
your business and retire. Because of your wonderful experiences at Fuqua,
you decide that you want to set up a trust to fund a scholarship in your
name. If the appropriate interest rate is 11% compounded annually, how
much money do you have to donate to ensure that a $10,000.00 scholarship
can be given out every year for the next forty years? Assume that the first
scholarship is to be given out one year after the money is donated.
6. As you graduate from Fuqua, two job offers stand out
above the rest. Smith Consulting and Jones Consulting have both made attractive
offers. They are both located in the city where you want to live and seem
equally fulfilling from the standpoint of a working environment. Both companies
have offered you $110,000 per year, have similar benefits and have offered
identical signing bonuses. While talking to employees at both companies,
you have discovered that Smith pays its employees once per month, while
Jones pays every week. Which offer is better?
Smith Consulting made
the better offer.
Jones Consulting made
the better offer.
The offers from both
companies is the same.
It is impossible to tell
without knowing the appropriate interest rate.
7. You borrow money on your credit card at 1.5% per month. What
is the effective annual interest rate?
8. A client promises to pay your company $1,550 in 65 days. Assuming
continuous compounding and an interest rate of 7%, what is the present
value of that payment.
9. On your 45th birthday, you start to plan for your retirement.
You decide to start saving $8,000 per year in a 401-k plan, starting on
your next birthday. If your plan earns interest of 12% per year, how much
money will you have in your 401-k account when you retire at age 65?
10. An investment of $3,000.00 will pay $5,000.00 in seven years.
What is the effective annual interest rate?