Exam 4: Time Value of Money

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?

Pelican Corporation is planning to invest $12,000 for the next 8 years. It will have to pay the amount at the beginning of each year. This form of payment is known as a(n) _____.

When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.

Paul wants to accumulate $14,500 in order to make the down payment for a new condo. Today he can start investing $2,500 annually in an investment account that pays 10 percent interest compounded annually. How long would it take him to have enough money to make the down payment?

An annuity with payments that occur at the beginning of each period is known as a _____.

Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? Use a financial calculator to make the calculation.

Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?

Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years? (Round your answer to two decimal places.)

The payment of utility bills is an example of _____.

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.

An investment carries an interest rate of 8% compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of payment represents a(n) _____.

A leading bank is coming up with an investment that pays 8 percent interest compounded semiannually. What is the investment's effective annual rate (rEAR)? Use a financial calculator to determine the amount.

Gale Corporation acquires a printing equipment through lease. The terms of the lease require the monthly lease payments to be made at the beginning of every month. This is an example of an annuity due.