Exam 5: Time Value of Money

Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.

How much would $100,growing at 5% per year,be worth after 65 years?

You plan to borrow $45,200 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?

Suppose you borrowed $27,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

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

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 the U.S.Treasury offers to sell you a bond for $597.25.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 would you earn if you bought this bond at the offer price?

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%,simple interest,with interest paid quarterly.Merchants Bank offers to lend you the $50,000,but it will charge 6.2%,simple interest,with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

Suppose you borrowed $15,000 at a rate of 11.8% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Starting to invest early for retirement reduces the benefits of compound interest.

What is the present value of the following cash flow stream at a rate of 10.0%? ​

A $150,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is CORRECT?

You plan to invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $25,000?

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

Suppose a State of California bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 6.2%,how much is the bond worth today?

Disregarding risk,if money has time value,it is impossible for the present value of a given sum to exceed its future value.

The present value of a future sum increases as either the discount rate or the number of periods per year increases,other things held constant.

You want to quit your job and go back to school for a law degree 4 years from now,and you plan to save $2,400 per year,beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions,how much will you have 4 years from today?

Your uncle has $415,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

Assume that you own an annuity that will pay you $15,000 per year for 12 years,with the first payment being made today.You need money today to start a new business,and your uncle offers to give you $156,000 for the annuity.If you sell it,what rate of return would your uncle earn on his investment?