Exam 4: Time Value of Money

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Your Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire.She wants to withdraw $40,000 at the beginning of each year, starting immediately.What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

You have just purchased a U.S.Treasury 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 will you earn on this bond?

Which of the following statements is CORRECT?

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

Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

What is the present value of the following cash flow stream at a rate of 12.0%? ​

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

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

At a rate of 6.5%, what is the future value of the following cash flow stream?

Your bank offers a savings account that pays 3.5% interest, compounded annually.If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Your investment advisor has recommended your invest in bonds that pay 6.0%, compounded annually.If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly.If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?