Exam 4: Time Value of Money

Interest-on-Interest Consider a $1,000 deposit earning 7 percent interest per year for four years.How much total interest is earned on the original deposit (excluding interest earned on interest)?

Which of the following investments would you prefer?

Solving for Rates What annual rate of return is earned on a $200 investment when it grows to $850 in 10 years?

Discounting One Year What is the present value of a $500 payment in one year when the discount rate is 5 percent?

How much would be in your savings account in 12 years if you deposited $1,500 today? Assume the bank pays 5 percent per year.

Explain why the Rule of 72 is less accurate with higher interest rates.

How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?

Say you double your money in five years.Explain why the rate of return is NOT 20 percent per year.

Discounting One Year What is the present value of a $250 payment in one year when the discount rate is 6 percent?

General TVM Five years ago,Jane invested $5,000 and locked in an 8 percent annual interest rate for 25 years (end 20 years from now).James can make a 20-year investment today and lock in a 10 percent interest rate.How much money should he invest now in order to have the same amount of money in 20 years as Jane?

Solving for Rates You invested $5,000 in the stock market one year ago.Today,the investment is valued at $4,500.What return did you earn? What return would you need to get next year to break even overall?

Rates over One Year Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Suppose a U.S.Treasury bond promises to pay $9,780.13 in three years.If bonds of this type are generating a 4 percent annual return,how much would you pay for this bond today?

Present Value What is the present value of a $750 payment made in 3 years when the discount rate is 5 percent?

The longer money can earn interest,

Rule of 72 Approximately how many years does it take to double a $300 investment when interest rates are 8 percent per year?

What is the future value of $600 deposited for 4 years earning an 11 percent interest rate annually?

Rates over One Year Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.

What annual rate of return is implied on a $5,000 loan taken next year when $7,700 must be repaid in year 8?

One Year Future Value What is the future value of $700 deposited for one year earning 4 percent interest rate annually?