Exam 5: The Time Value of Money

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

One bank offers you 4% interest compounded semiannually.What is the equivalent rate if interest is compounded quarterly?

Which of the following conclusions would be true if you earn a higher rate of return on your investments?

If you want to have $3,575 in 29 months,how much money must you put in a savings account today? Assume that the savings account pays 12% and it is compounded monthly (round to nearest $1).

If you wish to accumulate $200,000 in the child's college fund after 18 years,and can invest at a 7.5% annual rate,how much must you invest at the end of each year if the first deposit is made at the end of the first year?

You have contracted to buy a house for $250,000,paying $30,000 down and taking out a fully amortizing loan for the balance,at a 5.7% annual rate for 30 years.What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?

A retirement plan guarantees to pay you or your estate a fixed amount for 25 years.At the time of retirement you will have $100,000 to your credit in the plan.The plan anticipates earning 7% interest annually over the period you receive benefits.How much will your annual benefits be assuming the first payment occurs one year from your retirement date?

You just graduated and landed your first job in your new career.You remember that your favorite finance professor told you to begin the painless job of saving for retirement as soon as possible,so you decided to put away $2,000 at the end of each year in a Roth IRA.Your expected annual rate of return on the IRA is 7.5%.How much will you accumulate at retirement after 40 years of investing (note: this may assume that you are even retiring early)?

The future value of an annuity will increase if the interest rate goes up,but the present value of the same annuity will decrease as the interest rate goes up.

A bond maturing in 10 years pays $80 each year (including year 10)and $1,000 upon maturity.Assuming 10 percent to be the appropriate discount rate,the present value of the bond is

The time value of money is the opportunity cost of passing up the earning potential of a dollar today.

To evaluate or compare investment proposals,we must adjust the value of all cash flows to a common date.

You are currently earning 12% compounded semiannually.Your investment company is switching all accounts to daily compounding.What rate will give you the same effective annual rate of return as you are receiving now?

The present value of an annuity increases as the discount rate increases.

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly.Credit Onion is offering you a loan where payments are to be made semiannually; the rate on the loan is also 10%.Local Bank down the street is also offering a loan at 10% where the payments are made quarterly.Which loan has the lowest annual cost?

You borrow $25,000 to be repaid in 12 monthly installments of $2,292.00.The annual interest rate is closest to

If the future value of annuity A is greater than the future value of annuity B,then the present value of annuity A must also be greater than the present value of annuity B.

It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.

If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years,how much will be in the account at the end of the 20th year? Assume that the account earns 10% and round to the nearest $100.

You plan to go to Asia to visit friends in three years.The trip is expected to cost a total of $10,000 at that time.Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually,maturing three years from now.Uncle Lee has agreed to pay for all remaining expenses.If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years,how much must he deposit today,so you can visit your friends three years from today?