Exam 4: Time value of money

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

Suppose you borrowed $15, 000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Your Aunt Elsa has $500, 000 invested at 6.5%, and she plans to retire.She wants to withdraw $40, 000 at the beginning of each year, starting immediately.What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year, how large (in millions)will they be 5 years later?

Suppose Sally Smith plans to invest $1, 000.She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%.After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk, and assume that compounding occurs annually.)

Which of the following bank accounts has the lowest effective annual return?

American Express and other credit card issuers must by law print the Annual Percentage Rate (APR)on their monthly statements.If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?

Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

You are hoping to buy a new boat 3 years from now, and you plan to save $4, 200 per year, beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit, 3 years from now?

Suppose Randy Jones plans to invest $1, 000.He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%.After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk, and assume that compounding occurs annually.)

Which of the following statements is CORRECT?

You borrowed $50, 000 which you must repay in 10 years.You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate.You expect to earn 5% on your funds, and you expect a 3% inflation rate.To the nearest dollar, how large must your initial deposit be to enable you to reach your $50, 000 target?

Which of the following statements is CORRECT?

A $150, 000 loan is to be amortized over 6 years, with annual end-of-year payments.Which of these statements is CORRECT?

What is the present value of the following cash flow stream at a rate of 8.0%?

You expect to receive $5, 000 in 25 years.How much is it worth today if the discount rate is 5.5%?

After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5, 000 at the end of each year for 20 years.You could earn 5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

S.Treasury bond will pay a lump sum of $1, 000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?