Exam 5: The Time Value of Money

How much must be invested today in order to generate a 5-year annuity of $1,000 per year,with the first payment 1 year from today,at an interest rate of 12%?

In 2002,the U.S.inflation rate was below 2% and a few countries were even experiencing deflation.

A mortgage loan is an example of an amortizing loan."Amortizing" means that part of the monthly payment is used to pay interest on the loan and part is used to reduce the amount of the loan.

The discount factor is used to calculate the present value of $1 received in year t.

Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years,during which time the fund will earn 8% interest with monthly compounding?

How much can be accumulated for retirement if $2,000 is deposited annually,beginning 1 year from today,and the account earns 9% interest compounded annually for 40 years?

Assume your uncle recorded his salary history during a 40-year career and found that it had increased 10-fold.If inflation averaged 4% annually during the period,how would you describe his purchasing power,on average?

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

What is the present value of a four-period annuity of $100 per year that begins 2 years from today if the discount rate is 9%?

A loan officer states,"Thousands of dollars can be saved by switching to a 15-year mortgage from a 30-year mortgage." Calculate the difference in payments on a 30-year mortgage at 9% interest versus a 15-year mortgage with 8.5% interest.Both mortgages are for $100,000 and have monthly payments.What is the difference in total dollars that will be paid to the lender under each loan?

After reading the fine print in your credit card agreement,you find that the "low" interest rate is actually an 18% APR,or 1.5% per month.Now,to make you feel even worse,calculate the effective annual interest rate.

A furniture store is offering free credit on purchases over $1,000.You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year.The store next door offers an identical television for $3,650 but does not offer credit terms.Which statement below best describes the "free" credit?

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% .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 32 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?

If the future value of an annuity due = $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due,what is the implied discount rate?

What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in nominal terms and inflation is in existence?

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

What is the difference between real and nominal cash flows and between real and nominal interest rates?

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate.By approximately how much would the value change if these were annuities due?