Exam 5: The Time Value of Money

Al Corbin is 25 years old today and he wishes to accumulate enough money over the next 35 years to provide for a 20 year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday.He can save $2,000 at the end of each of the next 10 years and $3,000 each year for the following 10 years.How much must he save each year at the end of years 21 through 35 to obtain his goal? Assume that the average rate of return over the entire period will be 10%.

Approximately how long would it take to double my money if I invest it now at 18%?

An annuity due is one in which

What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded monthly?

Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded quarterly.Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded quarterly compared with one that is compounded annually.

What is the present value of the following net cash flows if the discount rate is 12%: Year Cash Flow 1-5 \ 10,000 each year 6-10 \ 15,000 each year 11-15 \ 17,000 each year

Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account.The new bus is expected to cost $180,000.How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter?

What is the net present value rule?

Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease arrangement.The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years.Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the

Many IRA fund managers argue that investors should invest at the beginning of the year rather than at the end.What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period?

When using a future value of an annuity table (e.g., Table III at the back of the book),

Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years.What is your monthly payment?

The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years.At a discount rate of 14 percent, what is the present value of this stream of lease payments?

A zero coupon bond with a $1,000 par value (future value) is selling for $356 and matures in 12 years.What is the implied discount rate (yield to maturity)?

Joe Brady just won a $450,000 lottery in Pennsylvania.Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years.Joe is 75 years old and wants his money now.He has been offered $140,827 to sell his ticket.What rate of return is the buyer expecting to make if Joe accepts the offer?

You plan to lease a Saab automobile that sells for $22,657 and has no salvage value.If the monthly lease is $499, with the first of 60 payments due immediately.What is the implied annual interest rate on your lease?

New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years.If you must pay $109,296 today for this annuity, what is your expected rate of return?

What monthly rate of interest will yield an annual effective rate of interest of 14%?

The Florida lottery agrees to pay the winner $250,000 at the end of each year for the next 20 years.What is the future value of this lottery if you plan to put each payment in an account earning 9 percent?