Exam 2: Tools for Financial Planning - Applying Time Value Concepts

Assuming a discount rate of 14 percent per year,Peter wants to know the market value of his investment today based on the following cash flows.Explain your reasoning.

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(Essay)

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Question 1

Correct Answer:

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Present value of years 1 - 5
This first part a five year annuity
P/Y is 1,C/Y is 1
FV = 0
I/Y = 14
N = 5
PMT = -20 000
CPT PV = 68 661.62
The second part is another five year annuity,the rest of which need to be discounted again to the present time to determine current market value.
FV = 0
I/Y = 14
N = 5
PMT = -35 000
PV yr 5 = $120 157.83
Then to PV it to now,
FV = 120 157
I/Y = 14
N = 5
PMT = 0
PV yr 5 = $62 406.21
So based on the discount factor of 14%,the market value today would be $131 067

Approximately how much would you need to invest today,to receive $200 in ten years,if you received an annual interest rate of ten percent?

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Question 2

Correct Answer:

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Betty wants to accumulate $1 million by the end of 20 years by making equal annual year-end deposits over the next 20 years.Assuming Betty can earn 10 percent over this period,how much must she deposit at the end of each year?

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Question 3

Correct Answer:

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What is the present value of $1000 to be received ten years from today,assuming an interest rate of nine percent per annum?

(Multiple Choice)

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Question 4

The shorter the time period,the lower the future value interest factor,other things being equal.

(True/False)

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Question 5

If you want to save $40 000 for a down payment on a home in five years,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to save each month?

(Multiple Choice)

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Question 6

Raymond wants to save the college tuition fees his child will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year.How much will Raymond have in ten years if he gets a rate of return of four percent?

(Multiple Choice)

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Question 7

Use an illustration to show the difference between annual,semi-annual,monthly and daily compounding.Give examples and illustrations using numbers from real life for each one.

(Essay)

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Question 8

The longer the time period,the higher the present value interest factor,other things being equal.

(True/False)

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Question 9

If you borrow money,you will receive interest.

(True/False)

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Question 10

If you want to have $10 000 for a down payment on a new car in three years' time,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to deposit as a lump sum today?

(Multiple Choice)

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Question 11

Ten percent compounded quarterly with 10 years' investment means 40 compounding periods.

(True/False)

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Question 12

Ishan plans to retire at age 40 with a decent lifestyle.He assumes that he can safely earn a real return of 4% annually on his money and that he would need $4000 a month to last until he turned 90.How much money would he need to have accumulated at age 40 (to the nearest thousand)if he were going to retire and no longer earn any money?

(Multiple Choice)

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Question 13

If you invested $10 000 when you turned 20 years of age and received a return of 11 percent annually,you would have over two million dollars when you turned 70.

(True/False)

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Question 14

Future value interest factor (FVIF)uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

(True/False)

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Question 15

Review all the considerations in a decision to take either a lump sum payment of $600 000 from a pension plan at retirement (age 65)versus a guaranteed monthly payment for life of $3000 (a life annuity).Assume the tax implications are neutral.Use calculations to illustrate your points and indicate what assumptions you use.Give your opinion on the best option.

(Essay)

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Question 16

ABC Bank offers term deposits with 8 percent compounded annually,while XYZ Bank offers term deposits with 7.9 percent compounded monthly.ABC Bank offers a higher effective yield.

(True/False)

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Question 17

Develop an example to illustrate the power of compound interest.Be sure to illustrate your points using numbers and calculations.

(Essay)

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Question 18

The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them.

(True/False)

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Question 19

How long will it take Ivy's money to triple in value at 12 percent compounded quarterly?

(Multiple Choice)

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Question 20

Showing 1 - 20 of 82

Assuming a discount rate of 14 percent per year,Peter wants to know the market value of his investment today based on the following cash flows.Explain your reasoning.

Approximately how much would you need to invest today,to receive $200 in ten years,if you received an annual interest rate of ten percent?

Betty wants to accumulate $1 million by the end of 20 years by making equal annual year-end deposits over the next 20 years.Assuming Betty can earn 10 percent over this period,how much must she deposit at the end of each year?

What is the present value of $1000 to be received ten years from today,assuming an interest rate of nine percent per annum?

The shorter the time period,the lower the future value interest factor,other things being equal.

If you want to save $40 000 for a down payment on a home in five years,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to save each month?

Raymond wants to save the college tuition fees his child will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year.How much will Raymond have in ten years if he gets a rate of return of four percent?

Use an illustration to show the difference between annual,semi-annual,monthly and daily compounding.Give examples and illustrations using numbers from real life for each one.

The longer the time period,the higher the present value interest factor,other things being equal.

If you borrow money,you will receive interest.

If you want to have $10 000 for a down payment on a new car in three years' time,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to deposit as a lump sum today?

Ten percent compounded quarterly with 10 years' investment means 40 compounding periods.

If you invested $10 000 when you turned 20 years of age and received a return of 11 percent annually,you would have over two million dollars when you turned 70.

Future value interest factor (FVIF)uses $1.00 to calculate the $1.00 over time with a given interest rate and the number of periods the $1.00 is compounded.

ABC Bank offers term deposits with 8 percent compounded annually,while XYZ Bank offers term deposits with 7.9 percent compounded monthly.ABC Bank offers a higher effective yield.

Develop an example to illustrate the power of compound interest.Be sure to illustrate your points using numbers and calculations.

The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them.

How long will it take Ivy's money to triple in value at 12 percent compounded quarterly?

Overview of a Financial Plan

Tools for Financial Planning - Planning with Personal Financial Statements

Tools for Financial Planning - Using Tax Concepts for Planning

Managing Your Financial Resources - Banking Services and Managing Your Money

Managing Your Financial Resources - Assessing, Managing, and Securing Your Credit

Managing Your Financial Resources - Purchasing and Financing a Home

Protecting Your Wealth - Auto and Homeowner's Insurance

Protecting Your Wealth - Health and Life Insurance

Personal Investing - Investing Fundamentals

Personal Investing - Investing in Stocks

Personal Investing - Investing in Bonds

Personal Investing - Investing in Mutual Funds

Retirement and Estate Planning - Retirement Planning

Retirement and Estate Planning - Estate Planning

Synthesis of Financial Planning - Integrating the Components of a Financial Plan

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