Exam 5: Time Value of Money

Your subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life,and you can renew it by paying $85 annually,beginning immediately,or you can get a lifetime subscription for $850,also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant,how many years must you live to make the lifetime subscription the better buy?

Which of the following statements is CORRECT?

You are considering two equally risky annuities,each of which pays $5,000 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?

Last year Dania Corporation's sales were $525 million.If sales grow at 10.5% per year,how large (in millions)will they be 8 years later?

Which of the following statements regarding a 15-year (180-month)$125,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs. )

Which of the following statements is CORRECT?

A time line is meaningful even if all cash flows do not occur annually.

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 5.7%,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?

Jose now has $500.How much would he have after 6 years if he leaves it invested at 5.1% with annual compounding?

How much would $5,000 due in 15 years be worth today if the discount rate were 5.5%?

You plan to invest in securities that pay 11.6%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

What is the PV of an ordinary annuity with 10 payments of $4,400 if the appropriate interest rate is 5.5%?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,500 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?

Which of the following statements is CORRECT?

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

Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

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. )

Suppose you borrowed $50,000 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?

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.