Exam 5: The Time Value of Money

In 1973 Gordon Moore one of Intel's founders predicted that the number of transistors that could be placed on a single silicon chip would double every 18 months, equivalent to an annual growth of 59 percent .The first microprocessor was built in 1971 and had 2,250 transistors.By 2003 Intel chips contained 410 million transistors, over 182,000 times the number thirty-two years earlier.What has been the annual compound rate of growth in processing power? How does it compare with the prediction of Moore's Law?

A perpetuity of $5,000 per year beginning today is said to offer a 15 percent interest rate.What is its present value?

Which of the following statements best describes the real interest rate?

How should we compare interest rates quoted over different time intervals-for example, monthly versus annual rates?

How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume a 10 percent interest rate and cash flows at end of period.

Other things being equal, the more frequent the compounding period, the:

You're ready to make the last of four equal, annual payments on a $1,000 loan with a 10 percent interest rate.If the amount of the payment is $315.47, how much of that payment is accrued interest?

Ahmed purchased a new vehicle costing $28,500 through the dealer's financing promotion.Monthly payments were made at the beginning of each month for 6 years at a rate of 5.5% compounded quarterly.Determine the total amount of interest paid over the 6 year period.

A stream of equal cash payments lasting forever is termed:

Describe the process for determining the present and future values associated with multiple cash flows that are received or paid through time.

Which of the following will increase the present value of an annuity, other things equal?

Would you prefer a savings account that paid 7 percent interest, compounded quarterly, over an account that paid 7.5 percent with annual compounding if you had $1,000 to deposit? Would the answer change if you had $100,000 to deposit?

Cash flows occurring in different periods should not be compared unless:

How much more would you be willing to pay today for an investment offering $10,000 in four years rather than the normally advertised five-year period? Your discount rate is 8 percent.

Which of the following factors is fixed and thus cannot change for a specific perpetuity?

Mrs.Brown is considering setting up a college fund for her grandson.Mrs.Brown wants to pay her grandson's tuition fees of $5,000 each year for four years.Assume that she saves an equal amount each year, and the first deposit is made one year from now.Interest rates will remain constant at 8 percent.How much must Mrs.Brown save each year? Assume her grandson will go to college in 18 years and tuition fees are paid once a year at the beginning of the year.

How much will accumulate in an account with an initial deposit of $100, and which earns 10 percent interest compounded quarterly for three years?

Prizes are often not "worth" as much as claimed.Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today.Assume an interest rate of 7 percent over the 20 years.

Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9 percent interest.What is the approximate size of the mortgage with these terms?

What is the effective annual interest rate on a 9 percent APR automobile loan that has monthly payments?