Exam 5: Time Value of Money 2: Analyzing Annuity Cash Flows

Consider that you are 30 years old and have just changed to a new job. You have $91,000 in the retirement plan from your former employer. You can roll that money into the retirement plan of the new employer. You will also contribute $400 each month into your new employer's plan. If the rolled-over money and the new contributions both earn a 7 percent annual return, how much should you expect to have when you retire in 38 years?

Given a 4 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,400.

You wish to buy a $30,000 car. The dealer offers you a 5-year loan with a 9 percent APR. What are the monthly payments? What is the monthly payment if you paid interest only?

What is the present value of a $500 deposit in year 1, and another $100 deposit at the end of year 4 if interest rates are 5 percent?

A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $2,000 per month for the next three years and then $1,000 per month for the two years after that. If the bank is charging customers 8.5 percent APR, how much would it be willing to lend the business owner?

You win $1,000 today, which happens to be your 20th birthday. You decide to deposit this money in an account and plan to add $1,000 to it each year on your birthday beginning one year from today. If you earn 10 percent per year in the account, how long will it take to grow to $750,000?

If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what is the future value of the same annuity due?

A car company is offering a choice of deals. You can receive $2,000 cash back on the purchase, or a 2 percent APR, 3-year loan. The price of the car is $17,000 and you could obtain a 3-year loan from your credit union, at 7 percent APR. Which deal is cheaper?

Bank A charges a 7.50 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 6.95 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

A mortgage broker is offering a 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5 percent APR interest rate. After the second year, the mortgage interest charged increases to 8 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

Level sets of frequent, consistent cash flows are called

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

What is the amount of interest and repayment of principal balance in month 2 for a loan of $10,000, paid monthly over five years at a 7 percent APR?

What is the present value of a $1,100 payment made every year forever when interest rates are 4.5 percent?

A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $2,500 per month for the next two years and then $3,000 per month for another two years after that. If the bank is charging customers 6.5 percent APR, how much would it be willing to lend the business owner?

Loan amortization schedules show

Monica has decided that she wants to build enough retirement wealth that, if invested at 7 percent per year, will provide her with $3,000 monthly income for 30 years. To date, she has saved nothing, but she still has 20 years until she retires. How much money does she need to contribute per month to reach her goal?

After saving diligently your entire career, you and your spouse are ready to retire with a nest egg of $600,000. You need to invest this money in a mix of stocks and bonds that will allow you to earn $5,000 per month for 30 years. What annual interest rate (APR) do you need to earn?

A furniture company is offering a choice of deals. You can receive $500 cash back on the purchase, or a 4 percent APR, 2-year loan. The price of the dining room set is $5,000 and you could obtain a 2-year loan from your credit union at 3 percent APR. What is the cost per month of each deal?