Multiple choice

1. You would like to have enough money saved to receive a growing annuity for 25 years, growing at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal? (assume that the growing perpetuity payments start one year from the date of your retirement. The interest rate is 12%)?  

a. $1,500,000 

b. $632,390 

c. $452,165 

d. None of the above 

2. In the growing annuity and growing perpetuity formulas; the most important assumption that is needed for the formulas to work correctly is:  

a. r < g 

b. r = g 

c. r > g 

d. No assumption is needed 

3. Which of the following statements regarding simple interest and compound interest are true?  

a. Problems in finance generally use the simple interest concept 

b. Problems in finance generally use the compound interest concept 

c. It does not really matter whether you use simple interest or compound interest for solving problems in finance 

d. None of the above 

4. If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using simple interest?  

a. $136 

b. $140.49 

c. $240.18 

d. None of the above