Exam 5: Time Value of Money

A local bank is offering a zero-coupon certificate of deposit for $25,000.At maturity,three years from now,the investor will receive $32,000.What is the rate of return on this investment?

You receive $1,000 in 1 year,$1,200 in 2 years,and $1,300 in 3 years.The present value today of these future receipts is ________ if the opportunity cost is 7 percent.

How much money would you have to deposit today to create an income stream that pays $10,000 one year from today and continues to make annual payments forever,with payments after the first $10,000 growing at 4% per year? Assume money that you invest today to fund this income stream earns a 7% rate of return.

You invest a certain amount of money today.The process of determining how much money that investment will produce in the future is called ________.

How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement?

Dan and Jia are 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 be worth in 5 years if inflation is expected to be 8 percent?

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? Assume that once they retire,the O'Rourkes will withdraw $40,000 from their retirement account at the end of each year.

A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity.He stipulates in the trust agreement that the principal may not be distributed.The grandchild may only receive the interest earned.If the interest rate earned on the trust is expected to be at least 7 percent in all future periods,how much income will the grandchild receive each year?

A deep-discount bond can be purchased for $312 and in 20 years it will be worth $1,000.What is the rate of interest on the bond?

How much would Sophie have in her account at the end of 10 years if she deposit $2,000 into the account today if she earned 8 percent interest and interest is compounded continuously?

Brian borrows $5,000 from a bank at 8 percent annually compounded interest to be repaid in five annual installments.Calculate the principal paid in the third year.

The effective annual rate increases with increasing compounding frequency.

Otto is planning for his son's college education to begin ten years from today.He estimates the end-of-the-year tuition,books,and living expenses to be $10,000 per year for a four-year degree.How much must Otto deposit today,at an interest rate of 12 percent,for his son to be able to withdraw $10,000 per year for four years of college?

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

What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years?

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? Assume that payments come at the end of each year.

Calculate the present value of $89,000 to be received in 15 years,assuming an opportunity cost of 14 percent.

Assume you have a choice between two deposit accounts.Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly.Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously.Which account provides the highest effective annual return?

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.

Dan plans to fund his individual retirement account (IRA)by contributing $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?