Exam 4: Time Value of Money

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding.What effective annual rate (EFF%) does the bank pay?

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements.If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

Starting to invest early for retirement reduces the benefits of compound interest.

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

You have purchased a U.S.Treasury bond for $3,000.No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000.What interest rate will you earn on this bond?

Your aunt has $500,000 invested at 5.5%, and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year, beginning immediately.When she makes her last withdrawal (at the beginning of a year), she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year, your withdrawal is at the end of that same year).What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum.If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Which of the following statements is CORRECT?