Exam 4: Time Value of Money

Compounding with Different Interest Rates A deposit of $500 earns the following interest rates: 5 percent in the first year 6 percent in the second year,and 8 percent in the third year. What would be the third year future value?

What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually?

Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?

Compounding with Different Interest Rates A deposit of $300 earns interest rates of 7 percent in the first year and 10 percent in the second year.What would be the second year future value?

General TVM Ten years ago,Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now).James can made a 20-year investment today and lock in a 6 percent interest rate.How much money should he invest now in order to have the same amount of money in 20 years as Jane?

With regard to money deposited in a bank,future values are:

Explain how discounting is the reverse of compounding.

We call the process of earning interest on both the original deposit and on the earlier interest payments:

Solving for Rates You invested $1,000 in the stock market one year ago.Today,the investment is valued at $1,250.What return did you earn? What return would you suffer next year for your investment to be valued at the original $1,000?

Assume you borrow $100 from a payday lender.The terms are that you must pay a fee of $25 in advance (today)and one year from now you need to repay $112.What implied interest rate are you paying?

Future Value At age 20 you invest $1,000 that earns 7 percent each year.At age 30 you invest $1,000 that earns 10 percent per year.In which case would you have more money at age 60?

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today.You are charged 8 percent interest per year.What amount will you pay back and how much interest will you pay?

What is the present value of a $7,000 payment made in six years when the discount rate is 4 percent?

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum.She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off.How much will you owe if you wait until year 3 to pay off the loan?

A stock investor deposited $3,450 six years ago.Today the account is valued at $2,180.What annual rate of return has this investor earned?

What annual rate of return is earned on a $13,000 investment made in year 2 when it grows to $17,000 by the end of year 7?

The process of figuring out how much an amount that you expect to receive in the future is worth today is called:

How does compounding help build wealth (or increase debt)over time?

Why is a dollar worth more today than a dollar received one year from now?

Rule of 72 Approximately what interest rate is needed to double an investment over four years?