Exam 4: Time Value of Money

Interest-on-Interest Consider a $500 deposit earning 5 percent interest per year for five years.How much total interest is earned on the original deposit (excluding interest earned on interest)?

Present Value What is the present value of a $200 payment made in 3 years when the discount rate is 8 percent?

When your investment compounds,your money will grow in a(n)__________ fashion.

How are future values affected by changes in interest rates?

You just won the lottery and after taxes you have $32,000.You want to have $1,000,000 by the time you are 65,which is 45 years from now.Assuming that you can earn 9 percent each on your money,how much (in dollars)of the $32,000 must you invest today?

A $400 investment has doubled to $800 in six years because of a 12.25 percent return.How much longer will it take for the investment to reach $1100 if it continues to earn 12.25 percent?

Compounding with Different Interest Rates A deposit of $1,000 earns the following interest rates: 8 percent in the first year 7 percent in the second year,and 8 percent in the third year. What would be the third year future value?

Ten years ago,Hailey invested $1,000 and locked in a 9 percent annual rate for 30 years (end 20 years from now).Aidan can make a 20-year investment today and lock in an 8 percent rate.How much money should he invest now in order to have the same amount of money in 20 years as Hailey?

What is the value in year 3 of a $10,000 cash flow made in year 20 if interest rates are 5 percent?

What is the value in year 2 of a $200 cash flow made in year 8 if interest rates are 3 percent?

Time value of money concepts can be used by:

The Rule of 72 is a simple mathematical approximation for:

Assume you borrow $500 from a payday lender.The terms are that you must pay a fee of $75 in advance (today)and one year from now you need to repay $750.What implied interest rate are you paying?

Which of the following is NOT true when developing a time line?

You invested $1,400 in the stock market one year ago.Today the investment is valued at $1,100.What return did you earn? What return would you need to get back next year to break even overall?

You want to retire in 25 years and you have just inherited $300,000.You believe you will need $1,450,000 upon retirement.What rate will you need to earn on the account to achieve this goal?

You are scheduled to pay a $350 cash flow in one year,and receive a $1,000 cash flow in years 3 and 4.If interest rates are 10 percent per year,what is the combined present value of these cash flows?

You have $50,000 in your account.Assuming no additional deposits are made and your account earns 8 percent per year,how long will it take for the account to have a balance of $500,000?

Five years ago,sales were $4 million.Today your company's sales are $10 million.What annual rate have sales been growing?

Show the time line for a $1000 cash inflow today,a $1262.48 cash outflow in year 4,and a 6 percent interest rate.