Exam 4: Time Value of Money

Alice's investment advisor is trying to convince her to purchase an investment that pays $250 per year.The investment has no maturity; therefore the $250 payment will continue every year forever.Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it.If Alice decides to buy the investment, she would receive the first $250 payment one year from today.How much should Alice be willing to pay for this investment?

At approximately what rate would you have to invest a lump-sum amount today if you need the amount to triple in six years? Assume interest is compounded annually.

Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually.Bank B offers a 2- year CD that is compounded semi-annually.The CDs have identical risk.What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments?

The coupon rate is the rate of return you could earn on alternative investments of similar risk.

You have some money on deposit in a bank account which pays a simple (or quoted) rate of 8.0944 percent, but with interest compounded daily (using a 365-day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit, and your friend offers to sell it to you for $8,000.If you buy the security, by how much will the effective annual rate of return on your investment change?

An amortized loan is a loan that requires equal payments over its life; its payments include both interest and repayment of the debt.

An annuity is a series of equal payments made at fixed equal-length intervals for a specified number of periods.

You have a 30-year mortgage with a simple annual interest rate of 8.5 percent.The monthly payment is $1,000. What percentage of your total payments over the first three years goes toward the repayment of principal?

In its first year of operations, 2002, the Gourmet Cheese Shoppe had earnings per share (EPS) of $0.26.Four years l in 2006, EPS was up to $0.38, and 7 years after that, in 2013, EPS was up to $0.535.It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are rates of growth for the earlier period and for the later period?

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments, that is, the value at the end of the third year?

Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months.What would your ending balance be 20 years afte initial $100 deposit was made?

Which of the following statements is correct?

At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.)

Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually.If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20?

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college.Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account.How much money will you receive?

As the winning contestant in a television game show, you are considering the prizes to be awarded.You must indicat sponsor which of the following two choices you prefer, assuming you want to maximize your wealth.Assume it is no January 1, and there is no danger whatever that the sponsor won't pay off. (1) $1,000 now and another $1,000 at the beginning of each of the 11 subsequent months during the remainder of the year, to be deposited in an account paying 12 percent simple annual rate, but compounded monthly (to be left on deposit for the year). (2) $12,750 at the end of the year. Which one would you choose?

Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of principal?

Which of the following payments (receipts) would probably not be considered an annuity due? Based on your knowledge and using logic, think about the timing of the payments.

Which of the following statements is most correct?

Find the present value of an income stream which has a negative flow of $100 per year for 3 years, a positive flow o $200 in the 4th year, and a positive flow of $300 per year in Years 5 through 8.The appropriate discount rate is 4 percent for each of the first 3 years and 5 percent for each of the later years.Thus, a cash flow accruing in Year 8 should be discounted at 5 percent for some years and 4 percent in other years.All payments occur at year-end.