Exam 9: Time Value of Money

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years. If your required rate of return is 10%, what is the present value of your winning lottery ticket?

A fixed-rate mortgage is an example of an annuity.

Moe borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is

As the number of periods increases, present value increases.

If the quarterly rate of interest is 2.5% and interest is compounded quarterly, then the EAR is:

The present value of an annuity of $5,000 to be received at the end of each of the 6 years at a discount rate of 4% would be:

With a(n) __________, equal payments (or receipts) occur at the end of each time period.

The future value of a $100 deposit in 10 years at 10% is $259.37.

Assume that a borrower is willing to pay you $2,000 at the end of three years in return for a sum of money now. To receive a return of 10%, how much are you willing to lend now?

A hospital received a contribution to its endowment fund of $2 million. The hospital can never touch the principal, but it can use the earnings. At an assumed interest rate of 9.5 percent, how much can the hospital earn to help its operations each year?

You need to have $35,000 on hand to buy a new Lexus five years from today. To achieve that goal, you want to know how much you must invest today in a certificate of deposit guaranteed to return you 3% per year. To help determine how much to investment today, you will use:

If you have an account with a 21.5% annual percentage rate where interest is compounded quarterly, what is the effective annual rate of interest?

For positive interest rates, the future value interest factor is

The effective annual rate is determined by multiplying the interest rate charged per period by the number of periods in a year.

The present value of a $100 annuity deposited for 10 years at 10% is $1,593.74.

The time value concept/calculation used in amortizing a loan is

If $1,000 were invested now at a 12% interest rate compounded annually, what would be the value of the investment in two years?

Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments. The first payment will be due one year from the loan date. How much will you have to pay each year?

Tom Vu deposited $5,000 in a savings account that paid 8% interest compounded quarterly. What is the effective rate of interest?

It will take approximately 9.6 years for a $100 deposit to result in a future value of $600 if I can earn 10% on my deposit.