Exam 5: Time Value of Money

You want to go to Europe 5 years from now,and you can save $3,600 per year,beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions,how much would you have just after you make the 5th deposit,5 years from now?

You just inherited some money,and a broker offers to sell you an annuity that pays $4,300 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?

Your uncle will sell you his bicycle shop for $280,000,with "seller financing," at a 6.0% nominal annual rate.The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years,and then make an additional final (balloon)payment of $50,000 at the end of the last month.What would your equal monthly payments be?

​Suppose you just won the state lottery,and you have a choice between receiving $2,575,000 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.

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD)that pays 11.4% interest,compounded annually.How much will you have when the CD matures?

All other things held constant,the present value of a given annual annuity increases as the number of periods per year increases.

What's the rate of return you would earn if you paid $2,280 for a perpetuity that pays $85 per year?

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 U.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?

You are considering investing in a bank account that pays a nominal annual rate of 7%,compounded monthly.If you invest $3,000 at the end of each month,how many months will it take for your account to grow to $200,000?

Your father paid $10,000 (CF at t = 0)for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $17,750 at the end of the 5th year.What is the expected rate of return on this investment?

Suppose you inherited $715,000 and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

Which of the following statements is CORRECT?

All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

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

What's the present value of $11,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

Jose now has $500.How much would he have after 6 years if he leaves it invested at 6.7% with annual compounding?​

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24th month,you will have $13,150 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

Suppose you inherited $325,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 17.75%,but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?