Exam 28: Time Value of Money

Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A,while Security B has an effective annual rate of 12%.After 11 years,the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually.)

Starting to invest early for retirement reduces the benefits of compound interest.

Which of the following statements is CORRECT?

Pacific Bank pays a 4.50% nominal rate on deposits,with monthly compounding.What effective annual rate (EFF%)does the bank pay?

Ellen now has $125.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

You want to open a sushi bar 3 years from now,and you plan to save $7,000 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Your Green Investment Tips subscription is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

If the discount (or interest)rate is positive,the present value of an expected series of payments will always exceed the future value of the same series.

A $250,000 loan is to be amortized over 8 years,with annual end-of-year payments.Which of these statements is CORRECT?

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education,and you must withdraw the money in 4 equal installments,beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?

How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

Which of the following statements is CORRECT?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.