Exam 4: Future Value, Present Value and Interest Rates

If a borrower and a lender agree on a long-term loan at a nominal interest rate that is fixed over the duration of the loan, how will a higher-than-expected rate of inflation impact the parties if at all?

Calculate the internal rate of return for a machine that costs $500,000 and provides annual revenue of $115,000 per year for 5 years. You can assume all revenue is received once a year at the end of the year.

Explain the suggestion that people may have their own "personal discount rate" and how that may affect decisions about borrowing and other financial matters.

Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.

Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?

Considering the concept of compounding, explain why in determining the future value of a $100 investment at 5 percent annual interest, you can't simply multiply $100 by (1.10) and get the correct answer.

Suppose the nominal interest rate on a one-year car loan is 8% and the inflation rate is expected to be 3% over the next year. Based on this information, we know:

Calculate which has a higher present value: an annual payment of $100 received over 3 years or an annual payment of $50 received over 7 years. In both cases the interest rate is 7% (or 0.07).

The interest rate that equates the price of a bond with the present value of its payments:

An investment grows from $2,000 to $2,750 over the period of 10 years. What average annual growth rate will produce this result?

Suppose a family wants to save $60,000 for a child's tuition. The child will be attending college in 18 years. For simplicity, assume the family is saving for a one-time college tuition payment. If the interest rate is 6%, then about how much does this family need to deposit in the bank today?

Which of the following best expresses the payment a lender receives for lending money for three years?

A lender expects to earn a real interest rate of 4.5% over the next 12 months. She charges a 9.25% (annual) nominal rate for a 12-month loan. What inflation rate is she expecting? If the lender is in a 30% marginal tax bracket, the borrower in a 25% marginal tax bracket, and they both have the same inflation expectations, what are the real after-tax rates each expects?

Sharon deposits $150.00 in her savings account at the bank. At the end of one year she has $156.38. What was the interest rate that Sharon earned?

What is the present value of $200 promised two years from now at 5% annual interest?

Which of the following best expresses the future value of $100 left in a savings account earning 3.5% for three and a half years?

The value of $100 left in a savings account earning 5% a year, will be worth what amount after ten years?

If the interest rate is zero, a promise to receive a $100 payment one year from now is:

The future value of $100 that earns 10% annually for n years is best expressed by which of the following?

What will be the amount owed at the end of one year if a borrower charges $100 on his/her credit card and doesn't make any payments during the year (assume the interest rate is 1.5% per month)?