Exam 3: The Time Value of Money Part 1

Consider the TVM equation: A decrease in the interest rate will decrease the future value, other things remaining equal.

Consider the TVM equation: Present values and interest rates are inversely related.

You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 3.875% per year, what is today's price (present value) for this bond?

You wish to make a sizeable down payment on a house and you currently have $18,325 invested at an annual rate of 4.75%. How much money will be in the account in 2.5 years if it continues to earn at its present rate?

Current annual dividends for Simpson's Frozen Foods Inc., are $1.35 per share. Four years ago, dividends per share were exactly $1.00. What has been the rate of growth for Simpsons dividends per share?

The Rule of 72 is a rule of thumb for estimating the interest rate necessary to double your money, given a period of time.

$1,000 received 5 years from today discounted at an annual rate of 10% has a smaller present value than $1,000 received 10 years from today discounted at an annual rate of 5%.

Other things remaining equal, the price today and the growth rate are inversely related.

In five years your oldest child will be in 8^th grade, at which point you and your family plan to vacation in Europe. You estimate that you will need $20,000 for the trip. How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.50% per year?

The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD television prices have dropped at an average rate of 9% per year in recent years. If you expect this trend to continue, how much will this style of television cost in three years?

The television commercial pitchman tells you he can double your money with a risk-free investment in just 10 years. If this is true, what interest rate must this risk-free investment earn on an annual basis? Solve this question using the Rule of 72 and then in a more exact fashion using a formula, your calculator, or computer. In today's rate environment, is the interest rate that you solved for a realistic annual rate of return for a risk-free investment?

The Rule of 72 can be used to quickly estimate interest rates necessary to double your money in a given time period without the use of a spreadsheet or calculator. However, the rule does NOT work for estimating growth rates.

Your friend John started college at the age of 18 with $63,450 already saved, because 18 years ago when he was born his parents placed money into a special college savings account earning 7.25% per year. How much money did John's parents place into his college account?

You grandparents leave on their dream vacation to Antarctica in two years.The cruise vacation will cost them $25,000. If they have already saved $23,500 and are investing it at a rate of 2.75% per year, will they have saved enough money for their trip?

A furniture store has a sofa on sale for $399.00, with the payment due one year from today. The store is willing to discount the price at an annual rate of 5% if you pay today. What is the amount if you pay today?

Sam wishes to invest $8,000 into an account earning 6% compounded annually. If he invests the money today, how much will be in the account in 6 years? If he waits three years before investing his $8,000 and invests that money for three years, will he earn one-half of the interest earned in the first scenario since he had the same amount invested at the same rate but for only one-half of the time? Explain how you arrived at your answer.

If college tuition and fees increase at an annual rate of 7% per year, and your little sister is currently starting her freshman year in high school, what is the expected cost of her first year of college in four years if tuition and fees are currently $6,850 per year? How much for the start of her senior year of college starting three years after that?

$100 invested at a rate of 5% for 10 years has the same future value as $100 invested at 10% compounded annually for 5 years.

Harry decided he was tired of being a poor college student when he visited a local electronics store and experienced its finest home theatre system. He determined that he would invest today a portion of the remaining money he earned last summer cleaning animal cages at the veterinary clinic. He plans to invest the money into an international mutual fund for 3.5 years and expects to earn an average annual rate of return of 15%. If Harry wants to have $4,000 in the account at the end of this time, how much must he invest today?

If you can earn 5.25% per year on your investments, how long will it take to double your money?