Exam 4: Time Value of Money

Now that your uncle has decided to retire,he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Suppose you are buying your first home for $145,000,and you have $15,000 for your down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Your aunt wants to retire and has $375,000.She expects to live for another 25 years,and she also expects to earn 7.5% on her invested funds.How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

A perpetuity pays $85 per year and costs $950.What is the rate of return?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Which of the following statements is CORRECT?

If the discount (or interest)rate is positive,the future value of an expected series of payments will always exceed the present value of the same series.

Your cousin will sell you his coffee shop for $250,000,with "seller financing," at a 6.0% nominal annual rate.The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years,and then make an additional final (balloon)payment of $50,000 at the end of the last month.What would your equal monthly payments be?

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%,how much is the bond worth today?

Pacific Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

Which of the following statements is CORRECT?

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

A $150,000 loan is to be amortized over 6 years,with annual end-of-year payments.Which of these statements is CORRECT?

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?