Exam 9: The Time Value of Money

The interest factor for the present value of a single sum is equal to (1 + i)/i.

In determining the compound sum of a single amount,one measures:

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years.At the time of retirement you will have $250,000 to your credit in the plan.The plan anticipates earning 9% interest compounded monthly.How much will your monthly benefits be,paid at the end of each month?

The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.

The longer the length of time between a present value and its corresponding future value,:

Mr.Blochirt is creating a university investment fund for his daughter.He will put in $850 per year at the end of each year for the next 15 years and expects to earn an 8% annual rate of return.How much money will his daughter have when she starts university?

Morgan D.expects to receive $200 per month for 10 years and $250 per month for the next 10 years.What is the present value of this 20-year cash flow? Use a 10% discount rate,assuming monthly compounding.

Under what conditions must a distinction be made between money to be received today and money to be received in the future?

The shorter the length of time between a present value and its corresponding future value:

Laura Diane is creating a university investment fund for her son Leland.She will put in $71.00 per month at the end of each month for the next 15 years and expects to earn an 8% annual rate of return,compounded monthly.How much money will Leland have when he starts university?

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years.The current yield is 8%.What is the future value?

Mr.Sheridan is selling his house for $280,000.He bought it for $55,000 15 years ago.What is the annual return on his investment,assuming monthly compounding?

After 20 years,100 shares of stock originally purchased for $1,000 was sold for $5,000.What was the annual yield on the investment? Choose the closest answer.

Ambrin Corp.expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years.What is the present value of this 20 year cash flow? Use an 11% discount rate.

The time value of money concept becomes less critical as the prime rate increases.

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year,to begin 10 years from now.To find the present value of this contract,which table or tables should you use?

In determining the PV_IF for the present value of $1,one could use the reciprocal of the FV_IF for the future value of $1 at the same rate and time period.

An amount of money to be received in the future is worth less today than the stated amount.

Inflation is the most important reason that a dollar today is worth more than a dollar in the future.

You are considering the purchase of a house.The house costs $300,000.You have no down payment.You have several financing alternatives. Alternative 1: 25 year mortgage term $\quad 6 \%$ interest $\quad$ bimonthly ( 24 payments/year) Alternative 2: 20 year mortgage term $\quad 6 \%$ interest $\quad$ bimonthly ( 24 payments/year) Alternative 3: 20 year mortgage term $\quad 6 \%$ interest $\quad$ monthly ( 12 payments/year) For each alternative calculate 1.The payment cost 2.Total cost over the term of the mortgage 3.Total interest cost over the term of the mortgage 4.Compare the results and recommend which is the best decision and explain why.