Exam 5: The Time Value of Money

An insurance company offers you an end of year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?

Explain the concept of interest and compare it to rate of interest.

If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?

Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by Mr. Moore.

Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is your monthly payment?

The present value of an ordinary annuity is the

More frequent compounding results in ____ future values and ____ present values than less frequent compounding at the same interest rate.

The ____ of a perpetual stream of equal, annual returns (PMT) discounted at i% per year is equal to ____.

Approximately how long would it take to double my money if I invest it now at 18%?

You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows?

Which of the following statements is/are correct? I. At 6% interest, the present value of: $400 for the first year, $600 for the second year, and $800 for the third year is $1,603.00. II. The future value of the following mixed cash flow stream (if it is from an annuity due at 6% interest): $400 for the first year, $600 for the second year, and $800 for the third year is $1,999 (rounded).

The present value of a(n) ____ is determined by dividing the annual cash flow by the interest rate.

Annuity due calculations are most common when dealing with: