Exam 5: The Time Value of Money

Two sisters each open IRAs in 2011 and plan to invest $3,000 per year for the next 30 years.Mary makes her first deposit on January 1,2011,and will make all future deposits on the first day of the year.Jane makes her first deposit on December 31,2011,and will continue to make her annual deposits on the last day of each year.At the end of 30 years,the difference in the value of the IRAs (rounded to the nearest dollar),assuming an interest rate of 7% per year,will be

Charlie wants to retire in 15 years,and he wants to have an annuity of $50,000 a year for 20 years after retirement.Charlie wants to receive the first annuity payment the day he retires.Using an interest rate of 8%,how much must Charlie invest today in order to have his retirement annuity (rounded to nearest $10)?

You wish to accumulate $10,000 by depositing $481.46 per month into a savings account that earns 4.75% compounded monthly.How many monthly deposits must you make?

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1.

If we invest money for 10 years at 8 percent interest,compounded semiannually,we are really investing money for 20 six-month periods,and receiving 4 percent interest each period.

The time value of money is the opportunity cost of passing up the earning potential of a dollar today.

How much money must you pay into an account at the beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays 12% per year,and round to the nearest $1.

A timeline identifies the timing and amount of a stream of cash flows,along with the interest rate it earns.

Your son will be attending an expensive university in 12 years.You deposit $5,000 per year for 12 years,beginning today.How much money will be in the college fund 12 years from now if the fund earns 8% per year?

A return of 12% compounded annually is the same as a return of 1% per month.

For a given stated interest rate,an investor would receive a greater future value with daily compounding as opposed to monthly compounding.

At 6 percent compounded monthly,how long will it take to triple your money?

You are currently earning 12% compounded semiannually.Your investment company is switching all accounts to daily compounding.What rate will give you the same effective annual rate of return as you are receiving now?

The present value of a single future sum of money is inversely related to both the number of years until payment is received and the discount rate.

You decide to borrow $250,000 to build a new home.The bank charges an interest rate of 8% compounded monthly.If you pay back the loan over 30 years,what will your monthly payments be (rounded to the nearest dollar)?

You are 21 years old today.Your grandparents set up a trust fund that will pay you $25,000 per year for 20 years,starting on your 65th birthday to supplement your retirement.If the trust can earn 7.5% per year,how much will your grandparents need to put in the trust fund today (rounded to the nearest ten dollars)?

A car manufacturer offers either $2,000 cash back or zero percent financing for 5 years.A rational consumer will always take the cash back because money received today is worth more than money received in the future.

Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments at the end of each of the next 5 years.Joe's payment will be $2,100 [($10,000/5)+ ($10,000 × 10%)].

You won the lottery and can receive either (1)$60,000 today,or (2)$10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should

You just invested $50,000 into an account that earns 7 percent compounded annually.At the end of each year you can withdraw $4,971.How many years can you continue to make the withdrawals?