1 of 8 0-day streak

Model and interpret a periodic cash-flow recurrence

Question 1 of 8

Calculator allowed

The following cash-flow model applies to the education fund

$V_n$ is the balance, in dollars, after $n$ years. The initial balance $V_0$ is recorded before the first period's interest

The initial balance is $31,000. The nominal annual interest rate is 5%, compounded annually

A regular addition of $100 is made at the end of each year

Interest is applied first. The regular cash flow is made at the end of each year; payments per year and compounding periods per year are both 1

V_{n+1}=R V_n+sD

(a)3 marks

Record $V_0$, $R$ and $D$ for this model

$V_0$ ($) $R$ $D$ ($)

(b)1 mark

Select the cash-flow term used after interest

-D

+D

State the per-year rate as a percentage, without rounding

$r_{year}$ (%)

Format: exact value

(d)1 mark

Convert the period rate back to a nominal annual rate. Give an exact value

Nominal annual rate (%)

Format: exact value

(e)1 mark

Which financial description agrees with the recurrence?

The regular addition is made before interest is applied to the balance

The fixed cash-flow term is the interest amount for every period

The fund balance receives a regular addition after interest in each period