Exam 5: Time Value of Money

You are considering two equally risky annuities,each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Last year Dania Corporation's sales were $525 million.If sales grow at 9.8% per year,how large (in millions)will they be 8 years later?

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

Suppose you borrowed $80,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year,after you have made the first payment?

Which of the following statements is CORRECT?

What's the future value of $4,400 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Which of the following statements is CORRECT?

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

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

Which of the following statements is CORRECT?

Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Midwest Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.8%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?

Your girlfriend just won the Florida lottery.She has the choice of $11,500,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Bob has $2,500 invested in a bank that pays 5.4% annually.How long will it take for his funds to double?

Last year Thomson Inc's earnings per share were $3.50,and its growth rate during the prior 5 years was 6.6% per year.If that growth rate were maintained,how many years would it take for Thomson's EPS to triple?

Suppose a State of California bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.4%,how much is the bond worth today?

You want to go to Europe 5 years from now,and you can save $3,800 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD)that pays 11.1% interest,compounded annually.How much will you have when the CD matures?