Exam 3: The Time Value of Money Part 1

Average U.S. wages in 1990 were $28,960, far larger than the average wage in 1930 of $1,970. What was the average annual increase in wages over this 60-year period?

If your bank offers a 5% annual rate of return compounded annually, then at the end of one year your $1.00 deposit would grow by $0.05 to $1.05. However, in the second year, your deposit would increase by $0.0525 to a total ending value of $1.1025. Explain why the second year earns more interest on the investment than the first year.

The school district needs to pass a bond levy for funding to remodel existing schools and to build new schools. Expenditures for the new and remodeled buildings will begin 18 months after passage of the bond. If the school district receives all funding immediately after the passage of the bond and can invest the funds at a rate of 3.75% per year, how large must the bond be for the district to have $45,000,000 at the start of construction?

Which of the following actions will DECREASE the present value of an investment?

Upon taking his first job out of college, your Dad earned an annual salary of $38,000 and set a goal to earn $100,000 per year. If his salary increased at an average annual rate of 12%, how long did it take to reach his goal?

Kirby Puckett became the first $3,000,000 man in major league baseball in 1990. By 2008, A-Rod was bringing in $27,500,000 per year. Did the annual change in the highest annual baseball salary rise more rapidly over this time period than from 1930 to 1990? Babe Ruth had the highest salary and made $80,000 in 1930.

In the equation r = (FV/PV)^1/n - 1, the r is sometimes referred to as the ________.

In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By January of 2011, the level had risen to 220.2. What was the average annual rate of inflation over this time period as measured by the CPI?

Consider the TVM equation: Present value and time period are inversely related.

Steve would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car. The current price of the car Steve wants to buy is $22,000, and the dealer expects the price of a similar new car to be $24,000 in two years. If Steve can earn an annual interest rate of 3% on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Steve purchases the car are $0. Please limit your considerations to the factors offered in the answer choices.

You plan to place a $40,000 down payment on a lake cabin in Northern Minnesota in five years. If you invest in a long-term CD earning an annual rate of 5.50%, how much would you need to invest today to have enough for the down payment in five years?

Which of the following formulas is correct for finding the present value of an investment?

Consider a two-year investment: Given a constant and positive interest rate, the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

At your birth, your grandparents put $5,000 into a college fund for you. Now you want to use the fund to pay your first year of college costs of $23,000. To have enough money in your college fund for your stated purpose, what annual rate of return would have to have been earned on the account over an 18-year period?

You win the $5,000,000 lottery that pays you $250,000 per year over a 20-year period. Given negative interest rates, the lottery has a present value that is less than $5,000,000.

You gave your little sister two rabbits for Easter three years ago and now she has 84 of the cute little bunnies. What is the average annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.

You won the state lottery and took the payout as a $1,283,475 lump sum today. Your spouse has decided that you need to invest this money for the next 10 years and can expect it to earn an average annual rate of return of 7.18%. If this comes to pass, how much money will be in the account at the end of the period?

Consider the TVM equation: The future value is always greater than the present value, even if the interest rate is negative.

You can invest your money at a rate of 7% per year. At this rate it will take you just over ________ years to double your money. Use the Rule of 72 to determine your answer.

A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?