Week 2


In this week we cover we learn about simple interest, compounding and discounting, present value and future value of a single sum and present value and future value of an ordinary annuity. 

Question 1

A person places $25,000 in a term deposit with a fixed term and interest rate of five years and 8% p.a., respectively. If the interest is compounded on a weekly basis what is the value of the investment at the end of the five years?

a. $27,081
b. $52,774
c. $37,280
d. $41,005

Question 2

What is the present value of $500 to be received at the end of each of the next three years assuming a discount rate of: 

  • 4% p.a.?
  • 25% p.a.?


Question 3

What quarterly payment is necessary to accumulate $1.5 million over 15 years if the annual interest rate is 6.75% compounded quarterly? Assume payments are made at the end of each quarter.

a. $10,703
b. $14,625
c. $18,534
d. $24,748

Question 4

The present value of a stream of two annual cash flows of $100 each beginning in one year’s time, where the interest rate is 5% p.a. for the first year and 8% p.a. for the second year is:

a. $178.01
b. $192.97
c. $185.32
d. $183.40

Question 5

What sum would Susan have to receive in five years’ time to make her indifferent between that sum and $1,000 in 10 years’ time? Susan is able to invest at an interest rate of 10% p.a.

a. $621
b. $500
c. $710
d. $645

Question 6

AMP Life Insurance offers a policy known as the ‘Pension Creator Six Pay’. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (parent or grandparent) makes the following six payments on behalf of the child to AMP:

1st  birthday        $730      

2nd birthday        $730      

3rd birthday         $730

4th birthday         $855

5th birthday         $855

6th birthday         $855

After the child’s sixth birthday no more payments are made. When the child reaches age 65 he or she receives a payout of $143,723 from AMP.

If the relevant interest rate for a bank deposit is 6 % p.a. for the first six years and 7 % p.a. for all subsequent years as the family’s investment adviser advise them as to whether the policy is worth buying?

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