Exam 28: Time Value of Money

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).

At the end of 10 years,which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate,but you must make monthly payments,which amounts to monthly compounding.What is the effective annual rate?

A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?

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

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

After receiving a reward for information leading to the arrest of a notorious criminal,you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Wildwoods,Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,compounded monthly?

You borrowed $50,000 which you must repay in 10 years.You plan to make an initial deposit today,then make 9 more deposits at the beginning of each the next 9 years,but with the deposits increasing at the inflation rate.You expect to earn 5% on your funds,and you expect a 3% inflation rate.To the nearest dollar,how large must your initial deposit be to enable you to reach your $50,000 target?

What is the present value of the following cash flow stream at a rate of 12.0%?

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank,but it will charge 6.0%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

Midway through the life of an amortized loan,the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Because your mother is about to retire,she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years,with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?