2. It is now March 1, 2006. You will deposit $1,000 today into a savings account that pays 8.5 percent. If

the bank compounds interest quarterly, how much will you have in your account on March 1, 2009? (2.5)

3. Pixy Sander borrows $20,000 at 8% annual rate of interest to be repaid over 4 years. The loan is

amortized into four equal, annual and end of year payments. Calculate the annual end of year payments

(PMT).

(2)

4. If the real rate of interest is 5% and the expected inflation premium is 1.5%, calculate the risk free rate

of return. Also, if the risk premium is given as 2.5%, what is the nominal rate of interest?

(1+1)

5. Simon will receive an inheritance of $500,000 three years from now. Simon's discount rate is 10%

interest rate compounded semiannually. What is the the amount that Simon should accept today for the

right to his inheritance?

(2)

6. Alfredo has a profit margin of 6%, a return on assets of 8%, and an equity multiplier of 1.4. What is the

return on equity?

(3)

7. You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first

day of each year. What is the value of this annuity today at a 7% discount rate? (2.5)

8. What is the effective annual rate if a bank charges you 7.64% compounded semi- annually? (2)