Exam 4: Time Value of Money

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Woodburn Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.0%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the smaller the percentage of the payment that will be a repayment of principal.

Your investment account pays 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

The going rate of interest on a 5-year treasury bond is 4.25%.You have one that will pay $2,500 five years from now.How much is the bond worth today?

Your bank offers a savings account that pays 3.5% interest,compounded annually.How much will $500 invested today be worth at the end of 25 years?

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%,how much is the bond worth today?

A time line is not meaningful unless all cash flows occur annually.

You are considering investing in a European bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

On January 1,2012,your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for 2012?

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education,and you must withdraw the money in 4 equal installments,beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

At a rate of 6.5%,what is the future value of the following cash flow stream?

Starting to invest early for retirement reduces the benefits of compound interest.

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate,compounded quarterly.If you also add another $5,000 to the account one year (4 quarters)from now and another $7,500 to the account two years (8 quarters)from now,how much will be in the account three years (12 quarters)from now?

Because your mother is about to retire,she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?