Exam 5: Time Value of Money

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?

Everything else being equal, the higher the interest rate, the higher the future value.

Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-year deposits over the next 20 years. If Zheng Sen can earn 10 percent on his investments, how much must he deposit at the end of each year?

The present value of $100 received at the end of year 1, $200 received at the end of year 2, and $300 received at the end of year 3, assuming an opportunity cost of 13 percent, is

China Manufacturing Agents, Inc. is preparing a five-year plan. Today, sales are $1,000,000. If the growth rate in sales is projected to be 10 percent over the next five years, what will the dollar amount of sales be in year five?

Calculate the future value of $6,490 received today and deposited for five years in an account which pays interest of 14 percent compounded semiannually.

Danny Joe borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is

Suzy wants to buy a house but does not want to get a loan. The average price of her dream house is $500,000 and its price is growing at 5 percent per year. How much should Suzy invest in a project at the end of each year for the next 5 years in order to accumulate enough money to buy her dream house with cash at the end of the fifth year? Assume the project pays 12 percent rate of return.

Nico makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was

The future value of an annuity of $1,000 each quarter for 10 years, deposited at 12 percent compounded quarterly is

James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000, which he will continue for the next 20 years. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account upon retirement will be

The present value of a $25,000 perpetuity at a 14 percent discount rate is

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 ________.

If a United States Savings bond can be purchased for $29.50 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond?

Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent?

The effective rate of interest differs from the nominal rate of interest in that it reflects the impact of compounding frequency.

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return?

In their meeting with their advisor, Mr. and Mrs. O'Rourke concluded that they would need $40,000 per year during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20-year retirement period. How much should Mr. and Mrs. O'Rourke deposit now in a bank account paying 9 percent to reach financial happiness during retirement?

The future value of a dollar ________ as the interest rate increases and ________ the farther in the future an initial deposit is to be received.

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