Exam 4: Time Value of Money

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation. 

The present value of an uneven cash flow can be determined by using the annuity equations. 

Identify the correct expression for the effective annual rate (EAR). 

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the investment?

Shekhar plans to invest $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. 

Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) _____. 

The present value of an investment increases as the opportunity cost rate increases. 

Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years?

Glen wants to take a holiday that costs $8,850, but currently he only has $2,750 saved. If he invests this money at 8 percent interest compounded annually, how long will he have to wait to take his holiday?

Ordinary annuity is an annuity with payments that occur at the beginning of each period. 

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____. 

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today. 

The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____. 

An annuity with payments that occur at the beginning of each period is known as a _____. 

In most instances, the payment of utility bills is an example of _____. 

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of Investment A and Investment B?

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment. 

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____. 

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n) _____.