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

To convert the table from ordinary annuity to annuity due is to multiple the annuity payment by (1+ i).

Mary deposits $4000 at the beginning of each year and the money will grow to $1 081 170 in 30 years with 12 percent compounded annually.

To calculate the present value,all you need is the amount of money in the future,the interest rate,and the number of years the money will be compounded.

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

Joe and Bill are the same age and starting their careers.Each plans to retire at age 65 and each wants to have $600 000 in his RRSP account by then.If they both get seven percent annual return on their RRSP savings,which one will be closer to reaching his goal?

Nick invests $50 000 today and the fund guarantees an annuity of $12 345 for six years.What is the approximate rate of return?

Selena wants to have enough funds to cover $13 000 per year for four years of her daughter's university expenses and will need the money at the beginning of each year.If her funds get an annual return of 4.3 percent,how much would she need to have in the account when her daughter starts university?

Your monthly life insurance payments due at the beginning of each month are an annuity due.

Naldo is considering selling a painting he inherited from his grandparents and which cost $200 when purchased 72 years ago.He accepted an offer for $22 000 for it recently.What is the annualized rate of return on this painting?

The amount to be invested today at a given interest rate over a specified period in order to equal a future amount is called

Ralph wants to know what he should be able to save in his child's RESP account if he contributes $2,500 per year and also gets the CES grant of $500 each year.He wants to assume a conservative investment return of four percent annual return and that he will only contribute until the child is 15 (assume 15 years of $3000 deposits).

Mortgages are annuities in that a fixed monthly fixed amount to the lender (assume monthly payments and an interest rate that compounds semi-annually).Sara is planning to take on a mortgage of $100 000 and believes she can afford monthly payments up to $700.How much interest would she save if she decided to pay off her mortgage over 20 years,rather than over 25 years? Her mortgage is at five percent interest calculated semi-annually.

Mary wants to have $150 after four years by depositing $100 today and earning six percent interest compounded annually for the next six years.Can Mary attain her financial goal of having $150 lump sum six years later?

Financial institutions quote rates with different compounding periods.What is the term for the actual interest rate paid or earned?

Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years.The interest rate is 5% compounded semi-annually.Her payments would be $1046 a month.She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead.How many years it would take her to pay off her mortgage if she chooses the second option.

Present value of the first year is determined by the future value divided by (1 + i).

Ruby is expecting her first child next month and would like to have $80 000 saved for university education when the child turns 17.If Ruby can get a 6.6 percent annual return on the education savings for her child,how much does she need to start saving each month once the baby is born?

Fred is 29 and just sold an antique for $29 311 that he purchased at age nine for $17 800.Fred's annual rate of return on this antique is 7.2 percent.

If you borrow $20 000 as a five-year loan from the bank and the bank requires you to make end-of-year payments of $4878.05,what is the annual interest rate on this loan?

The effective interest rate is the stated or quoted interest rate by the financial institutions.