Question 1
If a bank pays a5.5% nominal rate, with monthly compounding on deposits, what effective annual rate (EFF%) does the bank pay?
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5.35%
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5.64%
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6.13%
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6.59%
Question 2
John and Daphne are saving for their daughter Ellen’s university education. Ellen is now 10 years old and will be entering university 8 years from now (t = 8). University tuition and expenses at City U are currently $15,000a year, but they are expected to increase at a rate of4% a year. John and Daphne expect Ellen to graduate in 4 years. (If Ellen wants to go to graduate school, she will be on her own.) Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, John and Daphne have accumulated $14,000 in the university savings account. Their long-run financial plan is to add an additional $6,000 at the beginning of each of the next 4 years (at t = 0, 1, 2, and 3). Then they plan to make four equal annual contributions at the end of each of the following five years (t = 4, 5, 6, 7, and 8). They expect their investment account to earn8.5%. How large must the annual payments be at t = 4, 5, 6, 7, and 8 to meet Ellen’s anticipated university costs?
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$1,398.37
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$1,472.01
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$1,569.82
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$1,627.16
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