Exam 2: Tools for Financial Planning - Applying Time Value Concepts

Danny invests $124 090 in a fund and expects to receive $10 000 per year for the next 30 years. What is the approximate rate of return?

What is the future value of $200 received today and deposited at eight percent compounded annually for three years ?

The effective rate of interest and compounding frequency have an inverse relation.

For a deposit of $1000 to earn 4 percent interest annually, the interest earned is $40 per year.

The higher the interest rate, the lower the present value interest factor, other things being equal.

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

The longer the time period, the lower the present value interest factor, other things being equal.

The nominal interest rate is the actual rate of interest you earn or pay.

A series of future payments with equal cash flow means future value of annuity.

Rebeccah is 65 and planing to retire next month. She can select a pension of $1745 monthly guaranteed for the rest of her life, but not indexed for inflation, or take a lump sum of $312 000. Assume she can invest the lump sum at five percent annually and draw the same income as the pension. How long does she need to live in order for the monthly pension to be the better choice?

Ten percent compounded quarterly means 5 percent per compounding period.

The future value of today's $200 to be received 10 years later with an interest rate of 10 percent per annum is

Annuity due assumes a series of cash flows happening at the end of a period.

The present value of $100 will decrease with a particular discount rate, but the longer the period of time, the smaller the present value.

The present value interest factor is

An antique was originally purchased 50 years ago for $2 and today is worth $600. What is the approximate rate of return realized on the sale of this antique?

Raymond wants to save the college tuition fees he will need in ten years by starting with a deposit of $6500 today and depositing another $500 at the end of each year. How much will Raymond have in ten years if he gets a rate of return of four percent?

The effective interest rate is the stated or quoted interest rate by the financial institutions.

Hazel needs to plan how large a mortgage she can afford. How much would she need to pay monthly on a mortgage of $200 000 at six percent interest, calculated semi-annually and amortized over 30 years?

You can use either a financial calculator or a future value interest factor table to calculate future value.