Exam 4: The Time Value of Money

If the first payment made by an annuity is today,that is an ordinary annuity and not an annuity due.

Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35)and never makes another contribution.Worker B annually invests $1,000 in an IRA for thirty years (ages 36 through 65).Which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments?

Your uncle plans to leave you an inheritance of $200,000.If his life expectancy is twenty years,and the annual rate of interest is 9 percent,what is your inheritance currently worth?

You wish to have $100,000 after ten years to buy a nice boat.How much must you invest at the end of each year if you earn 8 percent annually on your funds?

The present value of a dollar 1)increases as the interest rate increases 2)decreases as the interest rate increases 3)increases as the time period increases 4)decreases as the time period increases

If interest rates are 0 percent,an annuity of $100 for ten years is the same as $1,000 today.

The future value of an annuity will be larger if 1)the annuity is an ordinary annuity 2)the annuity is an annuity due 3)the payments are made at the beginning of the year 4)the payments are made at the end of the year

A firm currently earns $1.00 per share.A financial analyst believes that earnings will grow annually at the rate of 10 percent for five years and then decline to 5 percent.What are the expected earnings after ten years?

A series of equal payments is called an annuity.

The larger the rate of interest,the smaller is the future value of a dollar.

Flight National's capacity is 120 passengers per flight.It currently carries 74 passengers per flight.Growth in passengers is expected to be 6 percent annually.New planes will have to be ordered when the company is carrying 90 percent of capacity.How long will it be before the firm must order new planes?

The present value of an annuity due is not affected by the frequency of compounding.

A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year).How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments were made at the beginning of the year?

An investment offers $10,000 at the end of each year for ten years.(a)If you can earn 10 percent annually,what is this investment worth today? (b)If you do not spend the annual payment but invest it at 10 percent,how much will you have after the ten years have lapsed?

The future value of an annuity of $100 at 8 percent for ten years exceeds $1,000.