Case 1 Essay

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 …show more content…

(14.3547)

4. Now considering a second alternative with 5 annual payments of $2,000 each. The payments are assumed made at the end of each year.

A. The type of annuity in which payments are made at the end of each year is referred to as an Ordinary Annuity (Annuity in Arrears) B. The future value of the annuity with payments of $2,000 each year at the end of 5 years is $12,210.20 with an interest rate of 10% compounded annually. Financial Calculator Inputs: $ -2,000=PMT, 5=N, 10=I, FV=? ($12,210.20) C. The future value of an annuity with yearly payments of $2,000 for five years deposited at the First National Bank which offers semiannual compounding of a nominal 10% interest rate is $12,271.11.

Calculations: EAR= (1=.10/2)^2 -1 =10.25%

Financial Calculator Inputs: 10.25=I, $2,000=PMT, 5=N, $0=PV, FV=? ($12,271.1147) D. Under 10% annual compounding of interest for 5 years, an annuity would require five equal payments of $3,275.95 in order to accumulate $20,000 after 5 years.

Financial Calculator Inputs: $20,000=FV, 10=I, 5=N, $0=PV, PMT=? ($-3,275.95)

E. A lump sum of $7,581.57 would be required if deposited today to compound to the equivalent of $12,210.20 in five years assuming an annual interest rate of 10% Financial Calculator Inputs: $12,210.20 (from part B)=FV, 10=I, 5=N, PV=? ($-7,581.57) F. Assuming