Question

please, i need help as soon possible.

After grabbing a cup of coffee at Aroma's you stroll past the local bank in downtown CW and see two posters in the window. One advertises financial products (e.g., annuities and perpetuities) and another advertises different savings accounts. Since you are considering a career in finance, you wonder what it would be like to be a banker. Assume for now that you are the bank's operating officer. A. (3 pts) If the bank can earn 6% on other financial products and loans, which of the following products would you most prefer to sell to consumers? Show your work for each option. 1. Option 1: The consumer will receive 15 annual payments of $4,100 starting immediately for which she pays $42,000 upfront. 1

Answer 1

: 1.FormulaThe present value of an ordinary annuity (PV)

PV = C× [1-(1+r)^-n]/r

PV = Present value (The cummulative amount available at Present)
C= Periodic cash flow.
r =effective interest rate for the period.
n = number of periods.

PV = 4100× [1-(1+r)^-15]/r

R= interest cost = 6.089%

PV = $42000(The cummulative amount available at Present)
C= Periodic cash inflow. $4100
r =effective interest rate for the period=?
n = number of periods. 15

2. ANNUAL FLOW/(r-g)= UPFRONT
g= growth rate =3%
1500/(r-3%)= 50,000

Solving for r:
r= 6%

Interest cost to bank = 6%

3. Formula
Future value= present value(1+r)^n
500,000 = 50,000 (1+r)^40
r= 5.925%

The bank should choose option 3.
As the interest cost is less over there and below 6% (banks earnings rate).