Exam 4: Time Value of Money

When a loan is amortized, the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.

Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Y all cash flows to be received at the end of the year.If you require a 14 percent rate of return, what is the present val cash flows?

Which of the following statements is most correct?

If $100 is placed in an account that earns a simple 4 percent, compounded quarterly, what will it be worth in 5 years?

What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the sooner the dollar is received the more quickly it can be invested to earn a positive return.

Suppose that the present value of receiving a guaranteed $450 in two years is $385.80.The opportunity rate of return on similar risk investments is 8 percent.According to this information, all else equal, which of the following statements is correct?

The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent, quarterly compounding.The loan is to be amortized in end-of-quarter payments over its 3-year life.How much interest (in dollars) will your company have to pay during the second quarter?

Of all the techniques used in finance, the least important is the concept of the time value of money.

Why is the present value of an amount to be received (paid) in the future less than the future amount?

You are currently at time period 0, and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year.Six full years from now you will receive the first payment on an additional $150 in perpetuity, and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity.If you require a 10 percent rate of return, what is the combined present value of these three perpetuities?

You are given the following cash flows.What is the present value (t = 0) if the discount rate is 12 percent?

A project with a 3-year life has the following probability distributions for possible end of year cash flows in each of the next three years: Using an interest rate of 8 percent, find the expected present value of these uncertain cash flows.(Hint: Find the expected cash flow in each year, then evaluate those cash flows.)

All else equal, if you expect to receive a certain amount in the future, say, $500 in ten (10) years, the present value of that future amount will be lowest if the interest earned on such investments is compounded

A perpetuity is an annuity with perpetual payments.

The difference between an ordinary annuity and an annuity due is that each of the payments of the annuity due earns interest for one additional year (period).

The effective annual rate is less than the simple rate when we have monthly compounding.

Susan just signed a long-term lease on a townhouse in New York City (near Central Park) that requires her to make equal monthly payments for the next five years.The payments Susan has promised to make represent a(n) the landlord.

Compounding is the process of converting today's values, which are termed present value, to future value.