Exam 5: Introduction to Valuation: the Time Value of Money

Thirty years ago, your father invested $11,000. Today, that investment is worth $287,047. What is the average annual rate of return your father earned on his investment?

Six years ago, Marti invested $3,500 in an account. No other investments or withdrawals have been made. Today the account is worth $7,403.16. What rate of return has Marti earned thus far?

Explain what compounding is and the relationship between compound interest earned and the number of years over which an investment is compounded.

Provide a definition of compound interest.

What is the future value of $7,540 invested at 6.5% interest for seven years?

When you retire forty years from now, you want to have $1 million. You think you can earn an average of 8.5% on your money. To meet this goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today. How much more will you have to deposit as a lump sum if you wait for five years before making the deposit?

Which one of the following interest rates will produce the largest value at the end of ten years given a lump sum investment of $5,000?

Interest earned on both the initial principal and the interest reinvested from prior periods is called ____________.

Interest earned on the reinvestment of previous interest payments is called simple interest.

You have just been awarded a $200,000 insurance settlement. The insurance company has offered to invest this amount at a guaranteed interest rate of 4.5% for ten years. You think you can invest this money yourself and earn an average return of 8%. If you are able to do that, how much more will your settlement be worth ten years from now than if you had left the funds with the insurance company?

The future value will increase the lower the rate of interest.

Today, your grandmother gave you a gift of $25,000 to help pay for your college education. She told you that this amount was the result of a one-time investment at 8% interest 13 years ago. How much did your grandmother originally invest?

Future value can be lower than present value

The term interest-on-interest refers to:

What is the future value of $4,160 invested for eight years at 8.5% compounded annually?

As long as the interest rate is greater than zero, the present value of a single sum will always:

Antoinette needs $20,000 as a down payment for a house five years from now. She earns 4% on her savings. Antoinette can either deposit one lump sum today for this purpose or she can wait a year and deposit a lump sum. How much additional money must Antoinette deposit if she waits for one year rather than making the deposit today?

Which one of the following statements is correct?

If you leave the money of $950 in the account for five years and the account earns 8% compounded annually, what will the balance in the account grow to?

Kurt invests $1,000 at a 10% rate of return for twenty years. The return is based on simple interest that is paid at the end of each year. Which one of the following is correct?