ECO 2059: Finance Economics

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ECO 2059: Finance Economics
Fall 2024
Practice Problems 2

Note: This document is not graded, and therefore submissions will not be accepted. The answers will be distributed during the class when we go over the questions.

Question 1

Trevor invested $4,000 in an account that pays 3% interest. How much money will he have at the end of 7 years a) with simple interest only, and b) with compound interest?

Question 2

Today, you earn a salary of $25,000. What will be your annual salary 6 years from now if you receive annual raises of 2%?

Question 3

Your uncle invested a lump sum 25 years ago at 5.5% annual interest. Today, he gave you the proceeds of that investment, totaling $47,078.88. How much did your uncle originally invest?

Question 4

Three years ago, you invested $2,000. Today it is worth $2,520. What rate of interest did you earn?

Question 5

Some time ago, Natasha purchased six acres of land costing $55,500. Today, that land is valued at $44,400. How long has she owned this land if the price of the land has been decreasing by 3% per year?

Question 6

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. 

Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively.

Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed)

A. Both projects have the same future value at the end of Year 4.
B. Both projects have the same value at Time 0.
C. Both projects are ordinary annuities.
D. Project Y has a higher present value than Project X.
E. Project X has both a higher present and a higher future value than Project Y.

Question 7

Which one of the following statements related to annuities and perpetuities is correct?
A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7% interest, compounded annually.
B. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
C. Most loans are a form of a perpetuity.
D. The present value of a perpetuity cannot be computed but the future value can.
E. Perpetuities are finite but annuities are not.

Question 8

Which one of the following statements concerning interest rates is correct?
A. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate.
B. The effective annual rate decreases as the number of compounding periods per year increases.
C. The effective annual rate equals the annual percentage rate when interest is compounded annually.
D. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate.
E. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

Question 9

You are considering two savings options. Both options offer a rate of return of 9%. The first option is to save $2,500, $3,500, and $4,500 at the end of each year for the next three years, respectively.

The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today?

Question 10

Your grandmother will be gifting you $100 at the end of each month for four years while you attend college. At a discount rate of 2%, what are these payments worth to you on the day you enter college?

Question 11

You want to be a millionaire when you retire in 35 years and expect to earn 6%, compounded monthly. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month?

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