Exam 4: Time Value of Money

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

An investment costs $1,000 (CF at t = 0) and is expected to produce cash flows of $75 at the end of each of the next 5 years,then an additional lump sum payment of $1,000 at the end of the 5th year.What is the expected rate of return on this investment?

You plan to invest in securities that pay 9.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment account to grow to $9,140.20?

You just won the lottery,and you have a choice between receiving $3,500,000 today or a 10-year annuity of $500,000,with the first payment coming 1 year from today.What rate of return is built into the annuity?

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years.How much would you still owe at the end of the first year,after you have made the first payment?

Your father now has $1,000,000 invested in an account that pays 9.00%.He expects inflation to average 3%,and he wants to make annual constant dollar (real) beginning-of-year withdrawals over each of the next 20 years and end up with a zero balance after the 20th year.How large will his initial withdrawal (and thus constant dollar [real] withdrawals) be?

Your uncle has $375,000 and wants to retire.He expects to live for another 25 years and to be able to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Your bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is correct?

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.Your uncle offers to give you $120,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?

Last year Mason Corp's earnings per share were $2.50,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Mason's EPS to double?

If we are given a periodic interest rate,say a monthly rate,we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

Which of the following are annuities due?

Your aunt is about to retire,and she wants to buy an annuity that will provide her with $65,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 6.25%.How much would it cost her to buy the annuity today?

One of the contributing factors in the 2007 U.S.residential housing collapse was the use of option reset adjustable rate mortgages (ARMs).Which of the following best describes this financial vehicle?

What is the present value of the following cash flow stream if the interest rate is 6.0% per year: 0 at Time 0; $1,000 at the end of Year 1; and $2,000 at the end of Years 2,3,and 4?

Your company has just taken out a 1-year installment loan for $72,500.The nominal rate is 12.0%,but with equal end-of-month payments.What percentage of the second monthly payment will go toward the repayment of principal?

Which of the following statements is NOT correct?

Suppose you take out a $10,000 loan at a 6% nominal annual rate.The terms of the loan require you to make 12 equal end-of-month payments each year for 4 years,and then an additional final (balloon) payment of $4,000 at the end of the last month.What will your equal monthly payments be?

If a bank compounds savings accounts quarterly,the nominal rate will exceed the effective annual rate.

You are analyzing the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which circumstance would lower the calculated value of the investment?