Exam 5: The Value of Money

Your child's orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up- front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?

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?

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

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

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

You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

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.

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

The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

You plan to 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?

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

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

Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 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?

A time line is not meaningful unless all cash flows occur annually.

You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?

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

Which of the following statements is CORRECT?

How much would $100, growing at 5% per year, be worth after 75 years?

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

After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?