Exam 3: Understanding and Appreciating the Time Value of Money

At the end of each year for ten years you deposit $750 in an account that earns an annual rate of return of 12%.What is the present value of these deposits?

It is not realistic for a 20-year-old to accumulate $1 million by the age of 65.

Using the Rule of 72,approximately how long will it take to double your money if you invest it at 8% compounded annually?

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

Suppose that you want to create a "college fund" for your newborn child and place $300 in a bank account at the end of each of the next 20 years.If that account earns an annual rate of return of 7%,how much will be in that account at the end of the twentieth year?

It is really pretty easy to create a valuable personal financial plan without understanding the time value of money principle.

List four reasons why you should care about the power of compounding and the time value of money.

What is the present value of an annual payment of $1,500 discounted back 15 years at an annual rate of return of 3%?

Suppose that you want to purchase some land to build a homestead in the future.You can afford payments of $5,000 each year and want to pay the loan back over the next 20 years.Assuming no down payment is required,how much can you borrow if the bank will charge you an annual interest rate of 12%?

Using the Rule of 72,if it will take approximately 12 years for your money to double,at what annually compounded interest rate is it invested?

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

What is the present value of $500 received at the end of each of the next five years worth to you today at the appropriate discount rate of 6 percent?

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%?

The I/Y key on a financial calculator stores the information for the interest rate or the discount rate per period.

Describe the two factors that affect how much we need to save to achieve financial goals.

If you set your calculator to the "end" mode your calculator will assume cash flows occur at the end of each time period.

With a 30-year mortgage loan of $100,000 at an annual interest rate of 7 percent,you will pay less $135,000 in interest before your loan ends.

Suppose that you had deposited $100 in a bank account for each of the last 5 years.What annual interest rate is attached to this account if there is now (at the end of the fifth year)$758.92 in the account?

Suppose that you invested $100 in a bank account that earned an annual rate of return of 10%.How much would you have in that bank account at the end of 10 years?

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. -Approximately how long will it take Arnold's savings to grow into $2,000?