Exam 5: Time Value of Money

Dan and Jia are newlyweds and have just purchased a condominium for $70,000. Since the condo is very small, they hope to move into a single-family house in 5 years. How much will their condo worth in 5 years if inflation is expected to be 8 percent?

For any interest rate and for any period of time, the more frequently interest is compounded, the greater the amount of money that has to be invested today in order to accumulate a given future amount.

Dan plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year?

The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12 percent, is

The rate of interest actually paid or earned, also called the annual percentage rate (APR), is the ________ interest rate.

Herbert has opened a retirement fund account which pays 7 percent interest and requires $5,000 annual deposits. Herbert will retire in 15 years and expects 10 years of retirement life. What is the maximum annual retirement benefit Herbert can get during his retirement years?

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.

You have been given a choice between two retirement policies as described below. Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10 years. Policy B: You will receive one lump-sum of $100,000 in 40 years from now. Which policy would you choose? Assume rate of interest is 6 percent.

Calculate the present value of the following stream of cash flows, assuming that the firm's opportunity cost is 15 percent.

For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is

The greater the interest rate and the longer the period of time, the higher the present value.

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

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was

Calculate the present value of $5,800 received at the end of year 1, $6,400 received at the end of year 2, and $8,700 at the end of year 3, assuming an opportunity cost of 13 percent.

Aunt Butch borrows $19,500 from the bank at 8 percent annually compounded interest to be repaid in 10 equal annual installments. The interest paid in the third year is ________.

Time-value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

________ is an annuity with an infinite life making continual annual payments.

What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?

Everything else being equal, the longer the period of time, the lower the present value.