Exam 5: Time Value of Money

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.

Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.

Suzy wants to buy a house but does not want to get a loan.The average price of her dream house is $500,000 and its price is growing at 5 percent per year.How much should Suzy invest in a project at the end of each year for the next 5 years in order to accumulate enough money to buy her dream house with cash at the end of the fifth year? Assume the project pays 12 percent rate of return.

A generous philanthropist plans to make a one-time endowment to a renowned heart research center which would provide the facility with $250,000 per year into perpetuity.The rate of interest is expected to be 8 percent for all future time periods.How large must the endowment be?

You have been given the opportunity to earn $20,000 five years from now if you invest $9,524 today.What will be the rate of return to your investment?

James plans to fund his individual retirement account,beginning today,with 20 annual deposits of $2,000,which he will continue for the next 20 years.If he can earn an annual compound rate of 8 percent on his deposits,the amount in the account upon retirement will be ________.

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?

The present value of $200 to be received 10 years from today,assuming an opportunity cost of 10 percent,is ________.

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

The effective rate of interest and compounding frequency are inversely related.

In comparing an ordinary annuity and an annuity due,which of the following is true?

The annual percentage rate (APR)is the nominal rate of interest,found by multiplying the periodic rate by the number of periods in one 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?

John borrowed $12,000 to buy a new car and expects to pay $564.87 per month for the next 2 years to pay off the loan.What is the loan's rate of interest?

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

A college received a contribution to its endowment fund of $2 million.It can never touch the principal,but can use the earnings.At an assumed interest rate of 9.5 percent,how much can the college earn to help its operations each year?

Assume Julian has a choice between two deposit accounts.Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly.Account B has an annual percentage rate of 7.45 percent with interest compounded continuously.Which account provides the highest effective annual return?

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year,assuming the firm can earn 17 percent on its investments.

You have been offered a project paying $300 at the beginning of each year for the next 20 years.What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment?

The effective rate of interest is the contractual rate of interest charged by a lender or promised by a borrower.