Exam 5: Time Value of Money

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

If you expect to retire in 30 years, are currently comfortable living on $50,000 per year and expect inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years?

Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.

When computing the number of deposits needed to accumulate to a future sum, it will take longer the lower the interest rate, holding the future value and deposit size constant.

When computing the number of deposits needed to accumulate to a future sum, it will take longer the higher the interest rate, holding the future value and deposit size constant.

A lottery administrator has just completed the state's most recent $50 million lottery. Receipts from lottery sales were $50 million and the payout will be $5 million at the end of each year for 10 years. The expenses of running the lottery were $800,000. The state can earn an annual compound rate of 8 percent on any funds invested. (a) Calculate the gross profit to the state from this lottery. (b) Calculate the net profit to the state from this lottery (no taxes).

To expand its operation, the International Tools Inc. (ITI) has applied for a $3,500,000 loan from the International Bank. According to ITI's financial manager, the company can only afford a maximum yearly loan payment of $1,000,000. The bank has offered ITI, 1) a 3-year loan with a 10 percent interest rate, 2) a 4-year loan with a 11 percent interest rate, or 3) a 5-year loan with a 12 percent interest rate. (a) Compute the loan payment under each option. (b) Which option should the company choose?

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?

To buy his favorite car, Larry is planning to accumulate money by investing his Christmas bonuses for the next five years in a security which pays a 10 percent annual rate of return. The car will cost $20,000 at the end of the fifth year and Larry's Christmas bonus is $3,000 a year. Will Larry accumulate enough money to buy the car?

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

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.

Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is

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

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?

Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager has asked him a question to test his knowledge. The question he asked is which rate should the bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings accounts? Explain. As a consumer, which would you prefer to see and why?

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.

Jeanne has just graduated from high school and has received an award for $5,000. She would like to deposit the money in an interest earning account until she graduates from college bank B pays 8 percent interest compounded semi-annually. Which is the better offer, and how much will Jeanne have upon graduation from college?

In general, with an amortized loan, the payment amount remains constant over the life of the loan, the principal portion of each payment declines over the life of the loan, and the interest portion declines over the life of the loan.

An annuity with an infinite life is called a(n)

How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?