Exam 5: Time Value of Money

You just inherited some money,and a broker offers to sell you an annuity that pays $16,800 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 bank offers to lend you $90,100 at an 8.5% annual interest rate to start your new business.The terms require you to amortize the loan with 10 equal end-of-year payments.How much interest would you be paying in Year 2?

Your Aunt Ruth has $340,000 invested at 6.5%,and she plans to retire.She wants to withdraw $40,000 at the beginning of each year,starting immediately.How many years will it take to exhaust her funds,i.e. ,run the account down to zero?

Five years ago,Weed Go Inc.earned $1.50 per share.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

Suppose you are buying your first condo for $180,000,and you will make a $15,000 down payment.You have arranged to finance the remainder with a 30-year,monthly payment,amortized mortgage at a 6.5% nominal interest rate,with the first payment due in one month.What will your monthly payments be?

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

What's the future value of $4,500 after 5 years if the appropriate interest rate is 6%,compounded semiannually?

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?

You have a chance to buy an annuity that pays $24,000 at the beginning of each year for 5 years.You could earn 4.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

​Suppose you just won the state lottery,and you have a choice between receiving $3,025,000 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.

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

What's the present value of $17,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $5,600 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?

Your girlfriend just won the Florida lottery.She has the choice of $10,800,000 today or a 20-year annuity of $1,050,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

You inherited an oil well that will pay you $26,000 per year for 25 years,with the first payment being made today.If you think a fair return on the well is 7.5%,how much should you ask for it if you decide to sell it?

Which of the following statements is CORRECT?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Suppose a State of New York bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 3.1%,how much is the bond worth today?