Q1: Suppose you have your choice of two investments accounts. Investment A is a 10-year annuity that features end-of-month $1,000 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is an 8 percent continuously compounded lump-sum investment, also good for 10 years.

Required:

a) How much money would you need to invest in B today for it to be worth as much as Investment A 10 years from now? (2 marks)

b) Suppose you are saving to buy a $150,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 5 percent. How long will it take your initial $95,000 investment to reach the desired level at First Bank, which pays simple interest? How long at Second Bank, which compounds interest monthly? (2 marks)

c) How does the present value of an amount to be received in the future change as the time is extended and as the interest rate increases? explain (1 mark)

d) Other things held constant, which annuity has the greater future value: an ordinary annuity or an annuity due? Why? (1 mark)

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