Exam 5: The Time Value of Money

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

If you only earned interest on your initial investment,and not on previously earned interest,it would be called simple interest.

Suppose a corporation can change its depreciation method so that its tax payments will decrease by $5,000 this year but increase by $5,000 next year.

You plan to go to Asia to visit friends in three years.The trip is expected to cost a total of $10,000 at that time.Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually,maturing three years from now.Uncle Lee has agreed to pay for all remaining expenses.If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years,how much must he deposit today,so you can visit your friends three years from today?

If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly,what will the account balance be in seven years?

You bought a racehorse that has had a winning streak for six years,bringing in $250,000 at the end of each year before dying of a heart attack.If you paid $1,155,720 for the horse 4 years ago,what was your annual return over this 4-year period?

Your son is born today and you want to make him a millionaire by the time he is 50 years old.You deposit $10,700 in an investment account and want to know what annual interest rate must you earn in order to have the account value equal to $1,000,000 on your son's 50th birthday.

When solving time value of money problems using Excel,the type = 0 variable means payments are made at the end of each period,and the type = 1 variable means payments are made at the beginning of each period.

A financial advisor tells you that you can make your child a millionaire if you just start saving early.You decide to put an equal amount each year into an investment account that earns 7.5% interest per year,starting on the day your child is born.How much would you need to invest each year (rounded to the nearest dollar)to accumulate a million for your child by the time he is 35 years old? (Your last deposit will be made on his 34th birthday.)

Manny and Irene will be retiring in fifteen years and would like to buy a Mexican villa.The villa costs $500,000 today,and housing prices in Mexico are expected to increase by 6% per year.Manny and Irene want to make fifteen equal annual payments into an account,starting today,so there will be enough money to purchase the villa in fifteen years.If the account earns 10% per year,what is the amount of each deposit?

How much money must you pay into an account at the end of each of 20 years in order to have $100,000 at the end of the 20th year? Assume that the account pays 6% per year,and round to the nearest $1.

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semiannually,what will the account balance be in seven years?

When solving a problem involving an annuity due,you must select the "beg" or beginning mode on your financial calculator.

A zero coupon bond pays no annual coupon interest payments.When it matures at the end of 7.5 years it pays out $1,000.If investors wish to earn 2.35% per year on this bond investment,what is the current price of the bond? (Round to the nearest dollar.)

What is the present value of an annuity of $4,000 received at the beginning of each year for the next eight years? The first payment will be received today,and the discount rate is 9% (round to nearest $1).

It is January 1st and Darwin Davis has just established an IRA (Individual Retirement Account).Darwin will put $1000 into the account on December 31st of this year and at the end of each year for the following 39 years (40 years total).How much money will Darwin have in his account at the end of the 40th year? Assume that the account pays 12% interest compounded annually and round to nearest $1000.

At what rate must $287.50 be compounded annually for it to grow to $650.01 in 14 years?

Betty borrows $60,000 at 12 percent compounded annually.The loan is to be repaid in five equal annual end-of-year installments.How much must each loan payment be?

You have the choice of two equally risk annuities,each paying $5,000 per year for 8 years.One is an annuity due and the other is an ordinary annuity.If you are going to be receiving the annuity payments,which annuity would you choose to maximize your wealth?