Exam 6: Time Value of Money

What would you be willing to pay today to receive $5,000 at the beginning of each year for the next 10 years if interest is earned at a rate of 8% compounded annually?

You have borrowed $180,000 to buy a new home. You plan to make monthly payments over a 25-year period. The bank has offered you a 10% interest rate compounded monthly. Calculate the total amount of interest you will pay the bank over the life of the loan.

Which of the following is a FALSE statement?

Each year a company is required to place money into a bank account to retire its bond's principal at maturity. If the bond's principal is $10 million, and bank interest is estimated at 8%, how much are the annual payments if they are to be made over the last 20 years of the bond's life?

Fidelity Mutual (an insurance company) has offered you a single premium annuity that will pay you $12,000 at the end of each year for the next 15 years. If you must pay $109,296 today for this annuity, what is your expected rate of return?

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases?

The principle behind time value of money is based on the fact that:

The present value of an annuity:

How much will you have to save each month to have $6,000 in two years if the interest rate is 18% compounded monthly?

A series of equal payments that occur at equal intervals and go on forever is called a(n):

What is the present value of the following investment opportunity. You invest $10,000 now and another $10,000 in one year. In return you receive $23,000 in two years. Other opportunities available with similar risk yield about 12%.

Which of the following is most correct?

A share of preferred stock pays a $2.00 quarterly dividend. Comparable investments should earn 8% compounded quarterly. The preferred should sell for $100.

Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end of the year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments?

Assuming a 5% annual discount rate, what is the value of receiving $100.00 annual payments perpetually starting today?

Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old. If the fund earns 10 percent interest compounded annually, what is the value of the fund today?

Ralph has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire. What will Ralph have at retirement if the account earns 10 percent compounded annually?

The annual percentage rate considers the effects of periodic compounding.

Calculate the amount today that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a discount rate of 10%.

An amortized loan is generally structured to provide constant payments each of which contains the same proportions of interest and principal repayment.