Exam 5: Time Value of Money

Montreal Financial Services Company offers a 50-year annuity of $50,000 per year with the first payment on January 1,next year.If your opportunity costs are constant over time,the price you are willing to pay for this annuity ______ over time.

You have received two job offers: ABC is offering to pay you $5,000 at the end of each month for five years and then $8,000 at the end of each month for the next five years. PQR is offering you $2,500 twice a month for the first five years and then $4,000 twice a month for the next five years. If your decision is based solely on money,which job offer do you prefer? Why? Note: no calculations are necessary.

The R&M Bank has offered you the choice between two loans: #1 charges interest at a rate of 9% compounded quarterly. #2 charges interest at a rate of 9.50% compounded semi-annually. Which loan do you prefer and why?

The R&M Bank currently offers an investment account with an interest rate of 6% compounded monthly.R&M wants to offer customers another account with interest compounded quarterly.If R&M wants the effective rates to be equal,what interest rate should R&M quote for the second account?

ABC Bank pays 2% simple interest compounded annually on an investment of $10,000.What is the interest earned in the fifth year?

Xiang invests $25,000 per year,starting in one year,for 20 years at an interest rate of 7%.What is the value of the investment at the end of the 20 years?

Consols are British bonds that were issued during the 18^th century that pay a constant coupon and are irredeemable.What type of payment is this?

Explain what the effective (or equivalent)annual interest rate is and why we use it.

The R&M Bank currently offers an investment account with an interest rate of 8% compounded semi-annually.R&M wants to offer customers another account with interest compounded monthly.If R&M wants the effective rates to be equal,what interest rate should R&M quote for the second account?

Explain the difference between simple interest and compound interest.

Valentino will receive $25,000 in 3 years.His opportunity cost is 8% compounded continuously.The present value of this cash flow is closest to

An investment pays $2,000 every second year for 20 years (a total of 10 payments).Your opportunity cost is 8% compounded semi-annually.The present value of this investment is

Lottery A pays $1,000 today and Lottery B pays $1,750 at the end of five years from now.If the discount rate is 5%,I should choose

Charles has $12,000 to invest.Charles' bank offers him the following investment accounts: Assuming that all the accounts have the same risk as the investment,Charles' opportunity cost is closest to

Which one of the following will increase the present value of an annuity?

You have currently accumulated $50,000 for retirement,and are planning to have $1,000,000 in 30 years when you retire.If you can add $6,000 each year,what interest rate do you require of your retirement fund?

Amir has obtained a $250,000 mortgage.The mortgage is amortized over 25 years and the term of the mortgage is 25 years.The mortgage interest rate is 9% compounded annually.Amir will begin making annual payments of $25,451.56 at the end of the year.How much of Amir's third payment is interest?

A pension fund pays out $50,000 a year in perpetuity,based on a cost of capital of 5%,to retiring employees.Alternatively,the employee can take out a lump sum of $1 million payable immediately.The employee should choose

For a given effective annual rate,the quoted rate ______ as the compounding frequency increases.

A dollar today is worth more than a dollar tomorrow because