Exam 1: Tools for Financial Planning - Applying Time Value Concepts

To calculate the present value,all you need is the amount of money in the future,the interest rate,and the number of years the money will be compounded.

An antique was originally purchased 50 years ago for $2 and today is worth $600.What is the approximate annual rate of return realized on the sale of this antique?

If the interest rate is zero,the future value interest factor equals

Julian is a student relying on student loans.He feels he would like to borrow an extra $4000 each year for the next four years to take vacations to recover from studying.Assume that no interest accrues until he completes his education and begins paying off the loan.The interest rate for the loan amount will be seven percent per year compounded monthly and he will pay it off over five years by making end of month payments.What would his monthly payment be on this loan?

The most important thing to note about an annuity is

Naldo is considering selling a painting he inherited from his grandparents and which cost $200 when purchased 72 years ago.He accepted an offer for $22000 for it recently.What is the approximate annualized rate of return on this painting?

Reza is trying to decide between to investment alternatives.Invest A allows her to invest $100 at the beginning of every month for 15 years at an interest of 9.0% per year.Investment B allows her to invest $1,350 at the end of every year for 15 years at 8.7% interest.Which of the following is true regarding these two alternatives?

What is the present value of $1000 to be received ten years from today,assuming an interest rate of nine percent per annum?

If you borrow money,you will receive interest.

The present value of an annuity can be obtained by discounting the individual cash flows of an annuity and totalling them.

What is the present value of an ordinary annuity paying $1550 each year for 15 years,with an interest rate of 6.6 percent per annum?

If you want to have $10 000 for a down payment on a new car in three years' time,assuming an interest rate of 4.5 percent compounded annually,how much money do you need to deposit as a lump sum today?

Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years.The interest rate is 5% compounded semi-annually.Her payments would be $1046 at the end of every month.She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead.How many years it would take her to pay off her mortgage if she chooses the second option.

You will receive $100 at the end of year one,$200 at the end of year two,and $300 at the end of year three.What is the present value of these cash flows today if the discount rate is 13 percent annually?

Review all the considerations in a decision to take either a lump sum payment of $600 000 from a pension plan at retirement (age 65)versus a guaranteed monthly payment for life of $3000 (a life annuity).Assume the tax implications are neutral.Use calculations to illustrate your points and indicate what assumptions you use.Give your opinion on the best option.

The effective interest rate is the stated or quoted interest rate by the financial institutions.

John wants to have a $10 000 down payment for his car in three years.If he puts away $7000 today and gets a 12.7% annual return,he will have the money he needs.

ABC Bank offers term deposits with 7.8 percent compounded quarterly,while XYZ Bank offers term deposits with 8 percent compounded annually.We know that ABC Bank offers a higher effective rate of return.

You make regular monthly rental payments at the beginning of each month.This is an example of an annuity due.

Assuming a discount rate of 14 percent per year,Peter wants to know the market value of his investment today based on the following cash flows.Explain your reasoning. Year Cash flows