Exam 5: Time Value of Money 2: Analyzing Annuity Cash Flows

You have reviewed your budget and determine that the most you can afford on a car loan is $455 per month. What is the most you can borrow if interest rates are 7% and you can pay the loan over 4 years?

When interest rates are lower, borrowers can

To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then

Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. If you get a 15-year mortgage with a 6% interest rate, what would the loan balance be in 7 years?

Present Value Given a 7 percent interest rate, compute the present value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,500, and $1,500.

When saving for future expenditures, we can add the ________ of contributions over time to see what the total will be worth at some point in time.

A perpetuity, a special form of annuity, pays cash flows

Which of the following will increase the present value of an annuity?

Your credit rating and current economic conditions will determine

Future Value of an Annuity What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent?

Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value

Future and Present Value of an Annuity Due If you start making $100 monthly contributions today and continue them for 5 years, what's their future value if the compounding rate is 10 percent APR? What is the present value of this annuity?

A perpetuity pays $250 per year and interest rates are 8.5%. How much would its value change if interest decreased to 5.5%? Did the value increase or decrease?

Present Value of Multiple Annuities A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per month for the two years after that. If the bank is charging customers 5.5 percent APR, how much would it be willing to lend the business owner?

A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $1,250 per month for the next 3 years and then $500 per month for two years after that. If the bank is charging customers 12% APR, how much would it be willing to lend the business owner?

You just bought a new home and have a 30-year mortgage with monthly payments. Which statement regarding your mortgage is correct?

You have secured a loan from your bank for two years to build your home. The terms of the loan are that you will borrow $120,000 now and an additional $52,000 in one year. Interest of 9% APR will be charged on the balance monthly. Since no payments will be made during the 2-year loan, the balance will grow. At the end of the two years, the balance will be converted to a traditional 30-year mortgage at a 6.5% interest rate. What will you pay as monthly mortgage payments (principal and interest only)?

Chase purchased a $23,000 car three years ago using a 14%, 6-year car loan. He has decided that he would sell the car now if he could get a price that would pay off the balance of his loan. What is the minimum price Chase would need to receive for his car? (Assume monthly payments.)

Present Value of a Perpetuity What's the present value, when interest rates are 10 percent, of a $75 payment made every year forever?

Number of Annuity Payments Joey realizes that he has charged too much on his credit card and has racked up $3,000 in debt. If he can pay $150 each month and the card charges 18 percent APR (compounded monthly), how long will it take him to pay off the debt?