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Exam 4: Time Value of Money

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Question 51

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Which of the following statements is CORRECT?

A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are not useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.
D) Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.
E) Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

F) A) and D)
G) B) and D)

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Question 52

Multiple Choice

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What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

A) $16,806
B) $17,690
C) $18,621
D) $19,601
E) $20,633

F) B) and D)
G) A) and D)

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Question 53

Multiple Choice

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What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

You want to buy new kitchen appliances 2 years from now, and you plan to save $8,200 per year, beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit, 2 years from now?

A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments.Which of these statements is CORRECT?

How much would $100, growing at 5% per year, be worth after 75 years?

Suppose a State of New Mexico bond will pay $1,000 eight years from now.If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?

Ellen now has $125.How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

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

Which of the following statements is CORRECT?

Suppose you borrowed $15,000 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?

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, 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?

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.

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

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 decreases as either the discount rate or the number of periods per year increases, other things held constant.

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

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

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly.The loan (principal plus interest) must be repaid at the end of the year.Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?