Exam 5: Time Value of Money

In general,with an amortized loan,the payment amount remains constant over the life of the loan,both the principal portion of and the interest portion declines over the life of the loan.

The present value of $100 to be received 10 years from today,assuming an opportunity cost of 9 percent,is ________.

Jia has just won a $20 million lottery,which will pay her $1 million at the end of each year for 20 years.An investor has offered her $10 million for this annuity.She estimates that she can earn 10 percent interest,compounded annually,on any amounts she invests.She asks your advice on whether to accept or reject the offer.What will you tell her? (Ignore Taxes)

A(n)________ is an annuity with an infinite life making continual annual payments.

When computing the number of deposits needed to accumulate a future sum,it will take longer if the interest rates are higher,holding the future value and deposit size constant.

Colin has inherited $6,000 from the death of Grandma Anna.He would like to use this money to buy his mom Hayley a new scooter costing $7,000,two years from now.Will Colin have enough money to buy the gift if he deposits his money in an account paying 8 percent compounded semiannually?

Which of the following is true of annuities?

Nico establishes a seven-year,8 percent loan with a bank requiring annual end-of-year payments of $960.43.Calculate the original principal amount.

The future value of a $2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is ________.

Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

The effective annual rate increases with increasing compounding frequency.

A deep-discount bond can be purchased for $312 and in 20 years it will be worth $1,000.What is the rate of interest on the bond?

When computing an interest or growth rate,the rate will decrease with an increase in future value,holding present value and the number of periods constant.

Ashley is planning to attend college when she graduates from high school 7 years from now.She anticipates that she will need $10,000 at the beginning of each of the four college years to pay for tuition and fees,and have some spending money.Ashley has made an arrangement with her father to do the household chores if her dad deposits $3,500 at the end of each year for the next 7 years in a bank account paying 8 percent interest.Will there be enough money in the account for Ashley to pay for her college expenses? Assume the rate of interest stays at 8 percent during the college years.

China Manufacturing Agents,Inc.is preparing a five-year plan.Today,sales are $1,000,000.If the growth rate in sales is projected to be 10 percent over the next five years,what will the dollar amount of sales be in year five?

Calculate the combined future value at the end of year 3 of $1,000 received at the end of year 1,$3,000 received at the end of year 2,and $5,000 received at the end of year 3,all sums deposited at 5 percent.

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

Thelma is planning for her son's college education to begin five years from today.She estimates the yearly tuition,books,and living expenses to be $5,000 per year for a four-year degree,assuming the expenses incur only at the end of the year.How much must Thelma deposit today,at an interest rate of 8 percent,for her son to be able to withdraw $5,000 per year for four years of college?

If the present value of a perpetual income stream is increasing,the discount rate must be ________.

An ordinary annuity is an annuity in which cash flows occur at the beginning of each period.