After understanding them, paraphrase them.Write more than 5 sentences or equations.In calculation problems, write appropriate formulas.
If you deposit $200 in one year, $300 in two years, and $400 in three years, how much will you have in three years? How much of this is interest? How much will you have in five years if you don’t add additional amounts? Assume a 6 percent interest rate throughout.
You are offered an investment that will pay you $300 in one year, $500 the next year, $700 the next year, and $900 at the end of the fourth year. You can earn 11 percent on very similar investments. What is the most you should pay for this one?
You are offered an investment that will make three $4,000 payments. The first payment will occur four years from today. The second will occur in five years, and the third will follow in six years. If you can earn 12 percent, what is the most this investment is worth today? What is the future value of the cash flows?
After carefully going over your budget, you have determined you can afford to pay $500 per month toward a new sports car. You call your local bank and find out that the going rate is 1 percent per month for 60 months. How much can you borrow?
You ran a little short on your spring break vacation, so you put $2,000 on your credit card. You can afford only the minimum payment of $30 per month. The interest rate on the credit card is 1 percent per month. How long will you need to pay off the $2,000? At this point, the problem boils down to asking: How long does it take for your money to triple at 1 percent per month?
Preferred stock (or preference stock) is an important example of a perpetuity. When a corporation sells preferred stock, the buyer is promised a fixed cash dividend every period (usually every quarter) forever. This dividend must be paid before any dividend can be paid to regular stockholders—hence the term preferred. Suppose the Fellini Co. wants to sell preferred stock at $200 per share. A similar issue of preferred stock already outstanding has a price of $30 per share and offers a dividend of $1 every quarter. What dividend will Fellini have to offer if the preferred stock is going to sell?
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