Exam 3: The Time Value of Money

A series of equal payments is called an annuity.

The present value of an annuity increases as the number of years increases.

You wish to have $100,000 after ten years for a major purchase such as a boat. How much must you invest at the end of each year if you earn 8 percent annually on your funds?

An increase in the rate of interest from 4 percent to 5 percent increases the present value of an annuity.

If you open an IRA and invest $3,000 a year (at the end of the year), how much will be in the account after twenty-five years if the funds earn 5 percent annually? How much would be in the account if payments were made at the beginning of the year?

The future value of a dollar 1. increases with higher interest rates 2. decreases with higher interest rates 3. increases as the time period increases 4. decreases as the time period increases

Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35)and never makes another contribution. Worker B annually invests $1,000 in an IRA for thirty years (ages 36 through 65). Which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments, assuming both investors work for a duration of thirty years?

Your brother, who is prone to bearing substantial risk, suggests that you buy a security for $10,000 that promises to pay you $100,000 at the end of 15 years. What is the implied annual return or yield on this investment?

The larger the rate of interest, the smaller is the future value of a dollar.

The concept of the time value of money is a means to bring together the present and the future.

The present value of an annuity is 1. larger the greater the rate of interest 2. smaller the greater the rate of interest 3. larger as the number of years increases 4. smaller as the number of years increases

Your uncle plans to leave you an inheritance of $200,000. If his life expectancy is twenty years, what is your inheritance currently worth if the anticipated return on investments is 9 percent?

An investor expects the price of a stock to double after eight years. What is the expected annual rate of growth?

If interest rates are 0 percent, an annuity of $100 for ten years is the same as $1,000 today.

Time value concepts may not be used to determine

A state lotto awarded a prize of $560,000 a year for the next 20 years starting today. If the state sold $21,900,000 in lotto tickets, what proportion of the sales will the state distribute if it earns 8% annually on invested funds?

A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments are to be made at the beginning of the year?

Which is the largest if the interest rate is 7 percent?

Compounding refers to the earning of interest on interest earned previously.

The present value of an annuity due exceeds the present value of an ordinary annuity.