Exam 5: The Time Value of Money

Today is your 20^th birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded semiannually.How much will be in the account on your 50^th birthday?

You are currently 25 years of age.You have developed a lifetime budget that includes $50,000 at age 40 for a college fund for your kids and $25,000 per year for 20 years to supplement your retirement,the first payment on your 60^th birthday and the last payment on your 79^th birthday.You open an investment account on your 25^th birthday that promises to pay 9% interest compounded annually.You want to deposit equal annual amounts into the account every year on your birthday,starting today (your 25^th birthday)and continuing until you are 40 years old (i.e.,the last deposit is made on your 40^th birthday).How much will each deposit have to be if you want to meet your financial goals?

The present value of a single future sum of money is inversely related to both the number of years until payment is received and the discount rate.

At an annual interest rate of 9%,an initial sum of money will double approximately every 8 years.

The present value of a single future sum

How much would you be willing to pay (rounded to the nearest dollar)for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

A financial analyst tells you that investing in stocks will allow you to double your money in 7 years.What annual rate of return is the analyst assuming you can earn?

How much would you be willing to pay (rounded to the nearest dollar)for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

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

You are going to pay $800 into an account at the beginning of each of 20 years.The account will then be left to compound for an additional 20 years until the end of year 40,when it will turn into a perpetuity.You will receive the first payment from the perpetuity at the end of the 41st year.If the account pays 14%,how much will you receive from the perpetuity each year (round to nearest $1,000)?

A compound annuity involves depositing or investing a single sum of money and allowing it to compound for a certain number of years.

When using a financial calculator,cash outflows generally have to be entered as negative numbers,because a financial calculator sees money "leaving your hands."

If you want to have $5,000 in 10 years,how much money must you put in a savings account today? (Assume that the savings account pays 4% and it is compounded daily; round to the nearest $1).

You sell valuable artifacts from your household estate for $200,000 and want to use the money to supplement your retirement.You receive the money on your 60^th birthday,the day you retire.You want to withdraw equal amounts at the end of each of the next 25 years.What constant amount can you withdraw each year and have nothing remaining at the end of 20 years if you are earning 7% interest per year?

You estimate you'll need $200,000 per year for 25 years starting on your 65^th birthday to live on during your retirement.Today is your 50^th birthday and you want to make equal deposits into an account paying 9% interest per year,the first deposit today and the last deposit on your 64^th birthday.How much must each deposit be (rounded to the nearest $10)?

Today is your 30^th birthday and you must choose between two retirement options.The first option will provide you with 10 equal annual payments of $100,000 beginning on your 65^th birthday.The second option will provide you with one payment of $1,000,000 on your 70^th birthday.If the interest rate is 6 percent per year and you are assured of living to at least 80 years of age,which option is better?

Bill saves $3,000 per year in his IRA starting at age 25 and continuing to age 65,when he retires.The amount Bill has in his IRA at age 65 can be characterized as the future value of an annuity.

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

An investment earning simple interest is preferred over an investment earning compound interest because the simplicity adds value.

How much money must be put into a bank account yielding 6.42% (compounded annually)in order to have $1,671 at the end of 11 years (round to nearest $1)?