Exam 5: The Time Value of Money

You deposit $5,000 per year at the end of each of the next 25 years into an account that pays 8% compounded annually.How much could you withdraw at the end of each of the 20 years following your last deposit if all withdrawals are the same dollar amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year period.The first withdrawal is made at the end of the first year in the 20-year period.)

Your parents are complaining about the price of items today compared to what they cost years ago.If an automobile that cost $12,000 in 1980 costs $40,000 in 2010,calculate the annual growth rate in the automobile's price.

To compound $100 quarterly for 20 years at 8%,we must use

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?

An investment will pay $500 in three years,$700 in five years and $1000 in nine years.If your opportunity rate is 6%,what is the present value of this investment?

Your daughter is born today and you want her to be a millionaire by the time she is 40 years old.open an investment account that promises to pay 11.5% per year.How much money must you deposit today so your daughter will have $1,000,000 by her 35th birthday?

A retirement home in Florida costs $200,000 today.Housing prices in Florida are increasing at a rate of 4% per year.Joe wants to buy the home in 8 years when he retires.Joe has $25,000 right now in a savings account paying 8% interest per year.Joe wants to make eight equal annual deposits into the savings account starting today.How much must each deposit be so Joe will have enough money in his savings account to buy the retirement home when he retires?

A 65 year-old man is retiring and can take either $500,000 in cash or an ordinary annuity that promises to pay him $50,000 per year for as long as he lives.Which of the following statements is MOST correct?

What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1.

It is your 6^th birthday today.You have a trust fund with $50,000 that is earning 8% per year.You expect to withdraw $30,000 per year for 7 years starting on your 22^nd birthday for graduate school.How much money will be left in the trust fund after your last withdrawal (rounded to the nearest $10)?

D'Anthony borrowed $50,000 today that he must repay in 15 annual end-of-year installments of $5,000.What annual interest rate is D'Anthony paying on his loan?

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.Now he's off to State U.What equal amount can they withdraw beginning today (his 18^th birthday)and each year for three additional years to spend on his education,assuming that the account now earns 7% annually.

You want $20,000 in 5 years to take your spouse on a second honeymoon.Your investment account earns 7% compounded semiannually.How much money must you put in the investment account today? (round to the nearest $1).

John has to pay $1,000 per month for his mortgage for another 5 years,but he is considering paying the mortgage off in one lump sum.John cannot calculate the present value of the payments using the annuity formulas because his payments are monthly and not once per year.

You are ready to retire.A glance at your 401(k)statement indicates that you have $750,000.If the funds remain in an account earning 9.0%,how much could you withdraw at the beginning of each year for the next 25 years?

If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly,what will the account balance be in seven years?

If we invest money for 10 years at 8 percent interest,compounded semiannually,we are really investing money for 20 six-month periods,and receiving 4 percent interest each period.

A rational investor would prefer to receive $1,200 today rather than $100 per month for 12 months.

An example of an annuity is the interest received from bonds.

U.S.Savings Bonds are sold at a discount.The face value of the bond represents its value on its future maturity date.Therefore