Exam 5: The Time Value of Money

Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e. a perpetuity), assuming you require an 8 percent rate of return on this investment.

____ is the return earned by someone who has forgone current consumption.

If the discount rate is 12%, what is the present value of the following cash flows:

When a loan is amortized over a five year term, the

A(n) ____ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever)

Annuity due calculations are especially important when dealing with

You wish to save $500,000 in the next 25 years. You notice that a corporate bond fund earns about 11 percent per year and that is where you put your savings. How much must you save each year to obtain your goal?

What is/are the difference(s) between simple interest and compound interest?

You plan to lease a Saab automobile that sells for $22,657 and has no salvage value. If the monthly lease is $499, with the first of 60 payments due immediately. What is the implied annual interest rate on your lease?

Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20 year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?

What is the difference between the nominal interest rate and the effective interest rate?

You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago. Determine the average annual rate of return on your investment, assuming the stock paid no dividends.

Idlewild Bank has granted you a seven year loan for $50,000. If your seven annual end of the year payments are $11,660.45, what is the rate of interest Idlewild is charging?

If the present value of a given sum is equal to its future value, then

In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?

New Jersey Mutual has offered you a single premium annuity that will pay you $12,000 per year (end of year) for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?

The annual effective rate of interest (i_eff ) is a function of:

You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is 10%, what is the present value of your bond?

What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly?

What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent?