Exam 5: Time Value of Money

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________.

In general, with an amortized loan, the payment amount grows over the life of the loan, the principal portion of each payment grows over the life of the loan, and the interest portion declines over the life of the loan.

How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement?

Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.

If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

Xiao Xin is planning to accumulate $40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000?

Nico is 30 years old and will retire at age 65. He will receive retirement benefits, but the benefits are not going to be enough to make a comfortable retirement life for him. Nico has estimated that an additional $25,000 a year over his retirement benefits will allow him to have a satisfactory life. How much should Nico deposit today in an account paying 6 percent interest to meet his goal? Assume Nico will have 15 years of retirement.

Future value increases with increases in the interest rate or the period of time funds are left on deposit.

Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 14 percent.

The present value of an ordinary annuity of $2,350 each year for eight years, assuming an opportunity cost of 11 percent, is ________.

Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.

Julian was given a gold coin originally purchased for $1 by his great-grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to ________.

A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be distributed. The grandchild may only receive the interest earned. If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how much income will the grandchild receive each year?

In their meeting with their advisor, Mr. and Mrs. O'Rourke concluded that they would need $40,000 per year during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20-year retirement period. How much should Mr. and Mrs. O'Rourke deposit now in a bank account paying 9 percent to reach financial happiness during retirement?

Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.

The present value of a $20,000 perpetuity at a 7 percent discount rate is ________.

Janice borrows $25,000 from the bank at 15 percent to be repaid in 10 equal annual installments. Calculate the end-of-year payment.

You have been given a choice between two retirement policies as described below. Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10 years. Policy B: You will receive one lump-sum of $100,000 in 40 years from now. Which policy would you choose? Assume rate of interest is 6 percent.

Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is ________.

Mr. Jackson has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Jackson choose if his opportunity cost is 9 percent?