Exam 5: Time Value of Money

Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

You 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?

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Which of the following bank accounts has the highest effective annual return?

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

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

Which of the following bank accounts has the lowest effective annual return?

Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?

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

All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

Which of the following statements is CORRECT?

Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?

Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

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?

Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.