Exam 4: Time Value of Money

Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you, DeVille will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7.You are confident the payments will be made, since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year, after you have made the first payment?

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal.The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

You have just purchased a U.S.Treasury bond for $747.25.No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000.What interest rate will you earn on this bond?

Which of the following statements is CORRECT?

At a rate of 6.5%, what is the future value of the following cash flow stream?

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit, 3 years from now?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Which of the following statements is CORRECT?

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months, assuming each month has 30 days?

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being made today.If you think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it?

How much would $100, growing at 5% per year, be worth after 75 years?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?