Exam 3: Understanding and Appreciating the Time Value of Money

You just purchased a vacant lot for your future son-in-law's home for $30,000. You financed that amount over 120 months. What would your monthly payment be if your interest rate was 12% compounded monthly?

John Madrid put $1,000 into a mutual fund yielding an 18% Annual Rate of Return. Using the Rule of 72 calculate approximately how long will it take to double in value.

The present value interest factor is the inverse of the corresponding future value interest factor.

What is the present value today of $150 that will be received in four years from now if the discount rate is 12%?

Present value lets us compare dollar values from different time periods.

Your money grows faster as the compounding period becomes longer.

Someone has offered you the opportunity to purchase an IOU. The IOU will pay back a total of $500 in three years. How much would you be willing to pay for that IOU today if you want to earn an annual rate of return of 16%?

Arnold learned something very valuable as a teenager from his dad. He was told to invest $1,000 at 12% interest at age 20 and leave it alone until age 65. Arnold's dad knew that one strategy that wealthy people use is to exercise self-discipline to never touch this long-term plan. Arnold is very happy he applied his dad's advice. -Suppose the investment rate of return were 18%. At this rate, when would Arnold reach the $1,000,000 mark?

Which financial planning concepts should be helpful to a couple planning for how much money to start saving for their retirement?

A compound interest table is useful in solving a time value of money problem. Name the variables involved.

The present value of a financial asset is what you should be willing to pay today for that financial asset.

Your great-uncle placed $500 a year in a bank account for your "college fund" for each of the last 18 years. How much is now in your college account (at the end of the eighteenth year) if your account earned an annual rate of return of 6%?

You have just remembered that four years ago you placed $1,000 in a bank account. If the bank was paying an annual rate of return of 8% during that time, how much should you have in your forgotten account?

What would be the interest rate on a loan of $39,927.10 that you paid off with annual payments of $10,000 for each of the next five years?

Sly's Used Cars just sold you a clunker (you need it to get to class on time). You financed the $4,728.48 purchase price for 24 months. They said your payment would be $250. What interest rate did they charge you (assume monthly compounding)?

A dollar received in the future is worth more than a dollar received today.

Arnold learned something very valuable as a teenager from his dad. He was told to invest $1,000 at 12% interest at age 20 and leave it alone until age 65. Arnold's dad knew that one strategy that wealthy people use is to exercise self-discipline to never touch this long-term plan. Arnold is very happy he applied his dad's advice. -If he sticks to this plan, Arnold's savings will have grown to approximately ________ by age 62.

Small changes in the interest rate can have a dramatic impact on future values.

Time value of Money calculations can be made much easier through the use of a financial calculator.

What is the price you would be willing to pay today for an IOU for $500 due in one year if you want to earn at least 16%?