Deck 13: Annuities and Sinking Funds

Question 1

The present value of an annuity looks from the present to the future.

Answer 1

False

Question 2

The value of an annuity is the series of payments and interest.

Answer 2

True

Question 3

Interest is not calculated in ordinary annuities.

Answer 3

False

Question 4

The amount of money one needs to invest in the future to receive a stream of payments in the present is called the present value of an ordinary annuity.

Question 5

Companies that plan to retire bonds in the future could utilize sinking funds.

Question 6

Sinking funds utilize the concept of compound interest.

Question 7

All annuities due are based on a semiannual payment.

Question 8

There is only one class of annuities.

Question 9

An annuity is one lump sum payment.

Question 10

The same table can be used to find the value of an annuity due if two extra periods are added along with the subtraction of one payment.

Question 11

A contingent annuity has a fixed amount of payments.

Question 12

Annuities certain have a specific stated number of payments.

Question 13

An ordinary annuity results in the deposit or payment being made at end of the period.

Question 14

The maturity value in compounding is like the value of an annuity.

Question 15

An annuity due provides a lower final value compared with an ordinary annuity.

Question 16

Maturity value is equal to principal plus interest.

Question 17

Sinking funds accumulate money in the present to accumulate a specific sum at a predetermined present date.

Question 18

An annuity due requires that deposits or payments be made at the end of the period.

Question 19

Annuities can be done manually or by computer.

Question 20

Insurance companies do not use annuities.

Question 21

Joe Sullivan invests $9,000 at the end of each year for 20 years. The rate of interest Joe earns is 8% annually. The final value of Joe's investment at the end of the 20th year on this ordinary annuity is (use the tables in the handbook):

A) $411,588.00
B) $88,362.90
C) $411,858.00
D) $88,632.90
E) None of these

Question 22

Ordinary annuity payments are made:

A) At the end of the period
B) Yearly
C) Monthly
D) At the beginning of the period
E) None of these

Question 23

A sinking fund:

A) Requires at the beginning one lump sum payment
B) Is really not an annuity
C) Aids in meeting a future obligation
D) Does not compound its money
E) None of these

Question 24

An annuity is:

A) Not used by lotteries today
B) A one-time payment
C) A stream of payments
D) Never made up of equal payments
E) None of these

Question 25

Ted Williams made deposits of $500 at the end of each year for eight years. The rate is 8% compounded annually. The value of Ted's annuity at the end of eight years is (use the tables in the handbook):

A) $5,318.30
B) $4,318.30
C) $2,837.03
D) $2,873.30
E) None of these

Question 26

In an ordinary annuity the interest on a yearly investment starts building interest:

A) At the beginning of the first period
B) At the end of the first period
C) During the first period
D) After the second period ends
E) None of these

Question 27

Lee Associates borrowed $60,000. The company plans to set up a sinking fund that will pay back the loan at the end of 12 years. Assuming a rate of 8% compounded semiannually, the amount to be paid into the fund each period is (use the tables in the handbook):

A) $1,350
B) $1,536
C) $1,653
D) $5,163
E) None of these

Question 28

How much would Howard Steele need to invest today so that he may withdraw $12,000 each year for the next 20 years, assuming a rate of 8% compounded annually? (Use the tables in the handbook.)

A) $117,817.20
B) $454,144.00
C) $112,817.20
D) $549,144
E) None of these

Question 29

Contingent annuities:

A) Have a fixed amount of payments
B) Pay for 30 years
C) Are only paid by the month
D) Have no fixed amount of payments
E) None of these

Question 30

An annuity due can use the ordinary annuity table if one extra period is added and:

A) Add one payment to total value
B) Subtract one payment from total value
C) Add two payments to total value
D) Subtract three payments from total value
E) None of these

Question 31

Jones Co. borrowed money that is to be repaid in 12 years. So that the loan will be paid back at end of the 12th year, the company invests $8,000 at end of each year at 5% compounded annually. The amount of the original loan was (use the tables in the handbook):

A) $127,336.80
B) $70,905.60
C) $127,636.80
D) $70,950.60
E) None of these

Question 32

Payments in annuities must be made:

A) Daily
B) Quarterly
C) Semiannually
D) Yearly
E) None of these

Question 33

Abby Mia wants to know how much must be deposited in her local bank today so that she will receive yearly payments of $18,000 for 20 years at a current rate of 9% compounded annually. (Use the tables in the handbook.)

A) $1,085.82
B) $1,463.13
C) $164,313
D) $163,313
E) None of these

Question 34

Nancy Billows promised to pay her son $600 quarterly for four years. If Nancy can invest her money at 6% in an ordinary annuity, she must invest how much today? (Use the tables in the handbook.)

A) $10,759.38
B) $10,759.83
C) $8,478.72
D) $8,478.27
E) None of these

Question 35

An annuity due compared with an ordinary annuity results in a:

A) Higher value
B) Lower value
C) Same value
D) Value three times the annuity due
E) None of these

Question 36

The present value of an ordinary annuity:

A) Tells how much money one needs to invest in the future
B) Is a lump sum
C) Can only be calculated manually
D) Indicates how much money needs to be invested today
E) None of these

Question 37

Ed Sloan invests $1,600 at the beginning of each year for eight years into an account that pays 10% compounded semiannually. The value of the annuity due is (use the tables in the handbook):

A) $41,344.48
B) $1,600.00
C) $38,744.48
D) $37,744.48
E) None of these

Question 38

Annuity due payments are made:

A) Monthly
B) At the beginning of the period
C) Yearly
D) At the end of the period
E) None of these

Question 39

At the beginning of each year, Bill Ross invests $1,400 semiannually at 8% for nine years. The cash value of the annuity due at the end of the ninth year is (use the tables in the handbook):

A) $38,739.68
B) $37,399.68
C) $37,939.86
D) $37,339.68
E) None of these

Question 40

Lance Rice has decided to invest $1,200 quarterly for eight years in an ordinary annuity at 4%. The total cash value of the annuity at end of year 8 is (use the tables in the handbook):

A) $46,642.80
B) $44,992.92
C) $46,246.80
D) $44,292.92
E) None of these

Question 41

Abby's Uncle Howard has promised her a gift upon graduation from high school of $2,000 or $200 every quarter for the next three years. If the money could be invested at 6%, which offer should Abby choose? (Show your calculations.)

Question 42

Alice Wolf wants to know how much she will have to invest today in order to receive an annuity of $6,000 for four years if interest is earned at 10% annually. She will make all her withdrawals at the end of each year. How much should Alice invest?

Question 43

Connie made deposits of $2,000 at the beginning of each year for four years. The rate she earned is 5% annually. What is the value of Connie's account in four years?

A) $11,051.00
B) $8,260.20
C) $8,260.00
D) $9,051.20
E) None of these

Question 44

At the beginning of each period for 9 years, Scott Sullivan invested $900 quarterly at 4% interest compounded quarterly. What is the value of this annuity due?

Question 45

Scott deposits $5,000 at the end of each year into an account for five years. Assuming 6% interest annually, what is the value of his account in five years?

A) $67,060
B) $21,873
C) $30,100
D) $28,185.50
E) None of these

Question 46

Find the value of an investment after three years on $15,000 made quarterly at 8% for (A) an ordinary annuity and (B) an annuity due.
A. $201,180
B. $205,204.50

Question 47

Find the value of an investment after six years for a $7,000 annuity due at 8% compounded annually.

Question 48

Find the value of an investment after four years on $6,000 made quarterly at 8% for (A) an ordinary annuity and (B) an annuity due.
A. $111,835.20
B. $114,072

Question 49

Alice Kate puts $2,500 in a bank at the end of every six months. The bank pays 2% compounded semiannually. Assuming Alice does this for four years, what is the total interest she will receive?

Question 50

Jim Hunter decides to retire to Florida in 10 years. What amount should Jim invest today so that he will be able to withdraw $25,000 at the end of each year for 30 years after he retires? Assume he can invest money at 9% interest compounded annually.

Question 51

Mike O'Brien plans to deposit $1,250 at the end of every six months for the next eight years at 6% interest compounded semiannually. What is the value of Mike's annuity at the end of eight years?

Question 52

Find the value of an investment after five years for a $6,000 ordinary annuity at 8% compounded annually.

Question 53

At the beginning of each year for 14 years, Sherry Kardell invested $400 that earns 10% annually. What is the future value of Sherry's account in 14 years?

A) $12,309
B) $13,100
C) $14,000
D) $12,709
E) None of these

Question 54

Angel Rowe wants to receive $7,500 each year for the next 25 years. Assume a 5% interest rate compounded annually. How much should Angel invest today?

Question 55

In 10 years, Longin Company will have to repay a $60,000 loan. Assume a 4% interest rate compounded quarterly. How much must Longin pay each period to have the $60,000 at the end of 10 years? Verify your result.

Question 56

Find the value of an investment after four years for a $7,000 annuity due at 10% compounded annually.

Question 57

Bram Johnson invests $500 at the end of each quarter for 10 years. The account earns 12% interest annually. What is the value of the account at the end of 10 years?

A) $37,700
B) $37,700.60
C) $37,000
D) $3,700
E) None of these

Question 58

Block Associates borrowed $75,000. The company plans to set up a sinking fund that will repay the loan after 15 years. Assume an 8% interest rate compounded semiannually. What must Block Associates pay into the fund each period? Verify your result.

Question 59

Jorgen Grace made deposits of $250 at the end of each year for 12 years. The rate received was 6% annually. What is the value of the investment after 12 years?

A) $2,028
B) $3,000
C) $4,217.48
D) $4,200
E) None of these

Question 60

Find the value of an investment after four years for a $7,000 ordinary annuity at 10% compounded annually.

Question 61

Use the tables in the handbook. What is the value of an investment after three years on an ordinary annuity of $5,000 made semiannually at 12%?

Question 62

Use the tables in the handbook. At the beginning of each year, Dick Raven invests $700 semiannually at 8% for eight years. What will be the cash value of this annuity due at the end of year 8?

Question 63

Use the tables in the handbook. Given an annuity due of $5,000, 12% semiannually for three years, what is the value of the investment at the end of three years?

Question 64

Use the tables in the handbook. Alvin Roz puts $2,000 in a bond at the end of every six months. The bank pays 12%, compounded semiannually. Assuming Alvin does this for three years; calculate the amount of total interest he will receive.

Question 65

Use the tables in the handbook. Pam Reed has decided to invest $500 quarterly for five years in an ordinary annuity at 12%. As her financial advisor, calculate for Pam the total cash value of the annuity at the end of year 5.

Question 66

Alice Hall made deposits of $300 semiannually to Rey Bank, which pays 8% interest compounded semiannually. After five years Alice made no more deposits. What would be the balance in the account four years from the last deposit?

Question 67

Use the tables in the handbook. Jackie Bell invests $5,000 at the end of each year for 15 years. The rate of interest Jackie gets is 8% annually. What is the final value of Jackie's investment in this ordinary annuity?

Question 68

Use the tables in the handbook. What must you invest today in order to receive an annuity of $6,000 for four years semiannually at 12%? All withdrawals will be made at the end of each period.