Exam 3: Understanding and Appreciating the Time Value of Money

For someone who has $100,000 to save for 20 years,would a 4% Certificate of Deposit that compounds annually be a better deal than a 3.94% Certificate of Deposit that compounds quarterly? Why?

Generally speaking,regularly saving a little money when you are young can result in a large final payoff.

What is the maximum that you would be willing to loan your brother for a $100 IOU if he promises to pay you back at the end of the year? You want to earn an annual rate of return of 12%.

Mark borrows $15,000 to buy a new car.His loan has an annual interest rate of 6.5%,compounded monthly,and his monthly payment is $293.49.How much will he have paid in interest when he has finished repaying his loan in 60 months?

You just purchased a premier lot in an exclusive neighborhood for your future home.The lot cost $50,000,an amount you financed with a 96-month loan.If your interest rate is 9.25 percent compounded monthly,which of the following is closest to your monthly payment?

An annuity is a series of unequal dollar payments coming at the end of each time period for a specified number of time periods.

What is the present value of a $1,000 payment at the end of each of the next 10 years discounted back to the present at 5%?

What would be the interest rate on a loan of $9,981.78 that you paid off with annual payments of $2,500 for each of the next five years?

As a teenager, Enrique learned a valuable lesson from his dad, who told him to invest $1,000 at 8 percent interest at age 20 and leave the money alone until age 65. Enrique's dad knew that one strategy used by wealthy people is to exercise self-discipline and never touch a long-term savings plan. Enrique is happy to apply his dad's advice. -Suppose the annual rate of return is 15 percent.At this rate,when will Enrique reach the $500,000 mark?

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

Jah-Malya can afford a car payment of $400 per month for 48 months at an annual rate of 8.25 percent interest.Which of the following is closest to the amount she will be able to borrow for a new car?

Suppose that you want to create a "retirement party fund" for yourself and place $50 in a bank account for each of the next 20 years.If that account earns an annual rate of return of 7%,how much will be in your retirement party fund at the end of the twentieth year?

Adrian, a single man who wants to buy a house in five years, read an article that recommended a down payment of 20 percent. With a large income and little debt, Adrian can afford to save a substantial amount of money every month. He is asking you for advice to help him reach his goal. -Assume that Adrian will need $30,000 for his 20 percent down payment in five years.If he locates an investment with a 9 percent rate of return that compounds annually,which of the following is closest to the amount that he will have to save each year?

The discount rate is the interest rate used to bring ________ back to ________.

Adrian, a single man who wants to buy a house in five years, read an article that recommended a down payment of 20 percent. With a large income and little debt, Adrian can afford to save a substantial amount of money every month. He is asking you for advice to help him reach his goal. -It is now five years later,and Adrian has saved enough money for a 20 percent down payment on a house.He will have to borrow $135,000 in a 30-year loan with an annual interest rate of 6 percent compounded monthly.What will his monthly mortgage payment be?

With a mortgage loan of $150,000 at an annual percentage rate of 6% for 30 years,you will pay over $150,000 in interest before your loan ends.

Consider that you are paying back a fully amortized loan.Which of the following statements is most correct?

Why should you care about the power of compounding and the time value of money?

A perpetuity is an annuity that continues forever.

One day as you were going through some old memorabilia,you discovered an old savings account in which you placed $100 twenty years ago.When you checked out the account,it currently had a balance of $320.71.What annual rate of interest did you earn?