Exam 4: The Time Value of Money

Sarah is thinking about purchasing an investment from HiBond Investing.If she buys the investment,Sarah will receive $100 every three months for five years.The first $100 payment will be made as soon as she purchases the investment.If Sarah's required rate of return is 16 percent,to the nearest dollar,how much should she be willing to pay for this investment?

As the discount rate increases without limit,the present value of the future cash inflows

Alice's investment advisor is trying to convince her to purchase an investment that pays $250 per year.The investment has no maturity; therefore the $250 payment will continue every year forever.Alice has determined that her required rate of return for such an investment should be 14 percent and that she would hold the investment for 10 years and then sell it.If Alice decides to buy the investment,she would receive the first $250 payment one year from today.How much should Alice be willing to pay for this investment?

The coupon rate is the rate of return you could earn on alternative investments of similar risk.

If a 5-year regular annuity has a present value of $1,000,and if the interest rate is 10 percent,what is the amount of each annuity payment?

You have the opportunity to buy a perpetuity which pays $1,000 annually.Your required rate of return on this investment is 15 percent.You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

All else equal,a dollar received sooner is worth more than a dollar received at some later date,because the sooner the dollar is received the more quickly it can be invested to earn a positive return.

By definition,what type of annuity best describes payments such as rent and magazine subscriptions (assuming the costs do not change over time)?

A perpetuity is an annuity with perpetual payments.

Your father,who is 60,plans to retire in 2 years,and he expects to live independently for 3 years.He wants a retirement income which has,in the first year,the same purchasing power as $40,000 has today.However,his retirement income will be of a fixed amount,so his real income will decline over time.His retirement income will start the day he retires,2 years from today,and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now,and he can earn 8 percent on savings now and in the future.How much must he save each year,starting today,to meet his retirement goals?

The effective annual rate is less than the simple rate when we have monthly compounding.

What is the term used to describe an annuity with an infinite life?

Gomez Electronics needs to arrange financing for its expansion program.Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly,and the quoted rate is 8 percent.Bank B will charge 9 percent,with interest due at the end of the year.What is the difference in the effective annual rates charged by the two banks?

Why is the present value of an amount to be received (paid)in the future less than the future amount?

All else equal,if you expect to receive a certain amount in the future,say,$500 in ten (10)years,the present value of that future amount will be lowest if the interest earned on such investments is compounded