Exam 4: Time Value of Money

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years. By how much would you reduce the amount you owe in the first year?

You have a chance to buy an annuity that pays $1,200 at the end 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 want to go to Europe 5 years from now, and you can save $3,100 per year, beginning 1 year from today. You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the fifth deposit, 5 years from now?

At a rate of 6.5%, what is the future value of the following cash flow stream: $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

An investment promises the following cash flow stream: $750 at Time 0; $2,450 at the end of Year 1 (or at t = 1); $3,175 at the end of Year 2; and $4,400 at the end of Year 3. At a discount rate of 8.0%, what is the present value of the cash flow stream?

Ten years ago, Levin Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in Levin's earnings per share (EPS) over the 10-year period?

How much would $5,000 due in 50 years be worth today if the discount rate were 7.5%?

A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is correct?

You plan to invest in securities that pay 9.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment account to grow to $9,140.20?

A Canada government bond promises to 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?

You plan to make annual deposits into a bank account that pays a 5.00% nominal annual rate. You think inflation will amount to 2.50% per year. What is the expected annual real rate at which your money will grow?

You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?

One potential benefit from starting to invest early for retirement is that the investor can expect greater benefits from the compounding of interest.

Merchants Bank offers to lend you $30,000 at a nominal rate of 6.0%, simple interest, with interest paid quarterly. Gold Coast Bank offers to lend you the $30,000, but it will charge 7.0%, simple interest, with interest paid at the end of the year. What's the DIFFERENCE in the effective annual rates charged by the two banks?

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1, $100 at the end of Year 2, $85 at the end of Year 3, and $625 at the end of Year 4. What rate of return would you earn if you bought this investment?

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is INCORRECT? (Ignore all taxes and transactions costs.)

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

You are considering investing in a Third World bank account that pays a nominal annual rate of 18%, compounded MONTHLY. If you invest $5,000 at the BEGINNING of each month, how many months will it take for your account to grow to $250,000? Round fractional years up.

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?

You plan to borrow $30,000 at a 7% annual interest rate. The terms require you to amortize the loan with six equal end-of-year payments. How much interest would you be paying in Year 2?