Exam 4: Time Value of Money

are negotiating to make a 7-year loan of $25,000 to Breck Inc.To repay you, Breck 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.Breck is essentially riskless, so you are confident the payments will be made.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?

Which of the following statements is CORRECT?

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.

much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?

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

present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

plan to borrow $35,000 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

want to buy a new sports car 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?

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

want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit, 2 years from now?

child's orthodontist offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

"growing annuity" is any cash flow stream that grows over time.

Suppose the U.S.Treasury offers to sell you a 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 would you earn if you bought this bond at the offer price?

Which of the following statements is CORRECT?

have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

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

Which of the following statements is CORRECT?

Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually.How much will you have when the CD matures?