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Exam 4: Time Value of Money

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Question 81

True/False

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

A) True
B) False

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Question 82

Multiple Choice

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Which of the following statements is CORRECT?

A) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
B) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
C) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
D) The cash flows for an annuity due must all occur at the beginning of the periods.
E) The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.

F) C) and D)
G) A) and E)

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Question 83

Multiple Choice

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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would lower the calculated value of the investment?

Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding.What effective annual rate (EFF%) does the bank pay?

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

The store where you bought new home furnishings offers you two alternative payment plans.The first plan requires a $4,000 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?

Your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for for the first year of the loan? (Assume she took out the loan on January 1.)

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

Your bank pays 4% interest annually.You have $2,500 invested in the bank.How long will it take for your funds to double?

Your uncle just won the weekly lottery, receiving $375,000, which he invested at a 7.5% annual rate.He now has decided to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)

Suppose you borrowed $12,000 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?

You expect to receive $5,000 in 25 years.How much is it worth today if the discount rate is 5.5%?

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

Your girlfriend just won the Florida lottery.She has the choice of $15,000,000 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?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually.How much will you have when the CD matures?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?