AFM 273 - Quiz #3

Name:
Student ID:

Multiple Choice Questions: Place an "X" in the shaded cell next to the co
Answer the questions on all "3" tabs.
Q1. Who calculates the Case-Shiller Index?
a) Standard and Poor's
b) government

c) Fiserv Inc.
d) real estate companies

Q2. How often is the 10-city composite index released?

a) annually
b) semi-annually
c) quarterly

1
2
10

d) monthly

aded cell next to the correct answer. (1 mark each)

Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your
you expect your salary to increase at a rate of 5% per year as long as you work. To save for your r
making annual contributions to a retirement account. Your first contribution will be made on you
8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you rea
rate of interest is 7%.

The future value at retirement (age 65) of your savings is closest to:

A) $497,530
B) $928,895
C) $1,263,236

4 marks

D) $108,000
Answer: B
Explanation: B) First deposit = .08 $45,000 = $3,600

$3,600 (1.07)35= $928,89

g on retirement at age 65. Your current salary is $45,000 and

as you work. To save for your retirement, you plan on
ontribution will be made on your 31st birthday and will be
ur salary each year until you reach age 65. Assume that the

3,600 (1.07)35= $928,895

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As th
become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a r
interest rate is 6%, then the value of this mining operation is equal to:

Value of the perpetuity:

$ 71,428.57

2 marks

Explanation: C) PV growing Perpetuity = C / r - g = 10,000 / (.06 -(-0 .08)) = $71,428.57

Calculate the percentage of the value of the perpetuity that is attributable to the first 20 payments:

0
4

1
10000

2
9,200.00

94.12%

2 marks

8,464.00

7,786.88

5
7,163.93

$67,226.04 9433.9623 8187.9672 7106.5376116 6167.9383 5353.3049434

0.941164528

#REF!

#REF!

#REF!

#REF!

e in the first year. As the ore closest to the surface is removed it will
mine will decline at a rate of 8% per year forever. If the appropriate

6
6,590.82

7
6,063.55

8
5,578.47

9
5,132.19

10
4,721.61

11
4,343.88

12
3,996.37

4646.2646679 4032.60707 3499.9986 3037.7346 2636.5244 2288.30419 1986.07533

13
3,676.66

14
3,382.53

15
3,111.93

16
2,862.97

17
2,633.94

18
2,423.22

19
2,229.36

1723.7635 1496.09662 1298.49895 1126.99909 978.150155 848.960512 736.833652

20
2,051.01
639.516

$67,226.04

1
PV C
(r g )

1 g
1

(1

r
)

PV (annuity of C for N periods with interest rate r )

r )

nterest rate r ) C

1
1
1

r
(1 r ) N