Exam 4: Time value of money

What's the future value of $1, 200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

If the discount (or interest)rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business.You expect to save and deposit $7, 500 a year for the first 6 years (t = 1 through t = 6)and $15, 000 annually for the following 6 years (t = 7 through t = 12).The first deposit will be made a year from today.In addition, your grandmother just gave you a $25, 000 graduation gift that you will deposit immediately (t = 0).If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

Because your mother is about to retire, she wants to buy an annuity that will provide her with $75, 000 of income a year for 20 years, with the first payment coming immediately.The going rate on such annuities is 5.25%.How much would it cost her to buy the annuity today?

You are considering two equally risky annuities, each of which pays $25, 000 per year for 10 years.Investment ORD is an ordinary (or deferred)annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Your investment account pays 8.0%, compounded annually.If you invest $5, 000 today, how many years will it take for your investment to grow to $9, 140.20?

You have just purchased a U.S.Treasury bond for $747.25.No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1, 000.What interest rate will you earn on this bond?

On January 1, 2012, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250, 000 at a nominal annual rate of 7.0%, with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for 2012?

Your bank offers a savings account that pays 3.5% interest, compounded annually.How much will $500 invested today be worth at the end of 25 years?

You are considering two equally risky annuities, each of which pays $15, 000 per year for 20 years.Investment ORD is an ordinary (or deferred)annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

A time line is not meaningful unless all cash flows occur annually.

Which of the following statements is CORRECT?

How much would $1, growing at 3.5% per year, be worth after 75 years?

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.How much would you still owe at the end of the first year, after you have made the first payment?

What's the present value of $4, 500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Suppose you just won the state lottery, and you have a choice between receiving $2, 550, 000 today or a 20-year annuity of $250, 000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.