Exam 4: The Time Value of Money

You are hurt in a car accident and your lawyer wins a $100,000 settlement to be distributed as follows: $20,000 immediate payment $5,000 a year for ten years starting now $30,000 after ten years. If the lawyer's fee is $10,000,what is the value of this settlement if the interest rate is 10 percent?

The future value of an annuity is 1)larger the higher the rate of interest 2)smaller the higher the rate of interest 3)larger the greater the number of years 4)smaller the greater the number of years

Which is the smallest if interest rates are 8 percent?

Time value concepts may not be used to determine

The future value of a dollar 1)increases with higher interest rates 2)decreases with higher interest rates 3)increases as the time period increases 4)decreases as the time period increases

If a bank pays 5 percent compounded daily,the true rate of interest is greater than 5 percent.

Discounting

An annuity is a series of

Compounding refers to the earning of interest on interest earned previously.

The present value of an annuity is 1)larger the greater the rate of interest 2)smaller the greater the rate of interest 3)larger as the number of years increases 4)smaller as the number of years increases

Which is the largest if interest rates are 7 percent?

The future value of an ordinary annuity will exceed the future value of an annuity due.

A homeowner has a ten-year home-improvement loan for $36,875.What are the annual payments required by the loan if the annual rate of interest is 10 percent?

An investor expects the price of a stock to double after eight years.What is the expected annual rate of growth?

Time value concepts may be used to determine 1)the annual growth rate in dividends 2)the amount in an IRA account after ten years 3)the tax owed on a capital gain

The present value of an annuity increases as the number of years increases.

The present value of an annuity due exceeds the present value of an ordinary annuity.

A piece of rental property will generate $10,000 a year for five years,$12,000 for the next five years,and then be sold at the end of the tenth year for $100,000.If you can earn 10 percent on your funds,what is the maximum you should pay for the property?

The concept of the time value of money is a means to bring together the present and the future.

If you open an IRA and invest $2,000 a year (at the end of the year),how much will be in the account after twenty-five years if the funds earn 10 percent annually? How much would be in the account if payments were made at the beginning of the year?