Exam 5: Time Value of Money

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

Suppose you borrowed $15,000 at a rate of 11.1% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Which of the following statements is CORRECT?

You deposit $500 today in a savings account that pays 6% interest,compounded annually.How much will your account be worth at the end of 40 years?

Disregarding risk,if money has time value,it is impossible for the future value of a given sum to exceed its present value.

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Suppose an Exxon Corporation bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 7.00%,how much is the bond worth today?

Suppose your credit card issuer states that it charges a 24.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

Suppose Sally Smith plans to invest $1,000.She 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 more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.

Your father is about to retire,and he wants to buy an annuity that will provide him with $84,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Your uncle has $260,000 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?

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $340.00 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?

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

Suppose you borrowed $37,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

What is the present value of the following cash flow stream at a rate of 10.0%? Years: 0 1 2 3 CFs: \ 750 \ 2,450 \ 3,175 \ 4,400 ?

Last year Rocco Corporation's sales were $700 million.If sales grow at 6% per year,how large (in millions)will they be 5 years later?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

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 $4,100.What interest rate would you earn if you bought this bond at the offer price?

A time line is meaningful even if all cash flows do not occur annually.