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Exam 4: Time value of money

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Question 61

True/False

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Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal.This is true regardless of the original life of the loan or the interest rate on the loan.

A) True
B) False

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Question 62

Multiple Choice

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A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

A) $1, 412.84
B) $1, 487.20
C) $1, 565.48
D) $1, 643.75
E) $1, 725.94

F) B) and E)
G) A) and B)

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Question 63

Multiple Choice

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You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24?? month, you will have $13, 000 in your account.If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

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

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 increase the calculated value of the investment?

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually.If you invest $2, 000 in the CD, how much will you have when it matures?

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

You want to purchase a motorcycle 4 years from now, and you plan to save $3, 500 per year, beginning immediately.You will make 4 deposits in an account that pays 5.7% interest.Under these assumptions, how much will you have 4 years from today?

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?

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

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?

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

Scott and Linda have been saving to pay for their daughter Casie's college education.Casie just turned 10 at (t = 0) , and she will be entering college 8 years from now (at t = 8) .College tuition and expenses at State U.are currently $14, 500 a year, but they are expected to increase at a rate of 3.5% a year.Ellen should graduate in 4 years¾if she takes longer or wants to go to graduate school, she will be on her own.Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11) . So far, Scott and Linda have accumulated $15, 000 in their college savings account (at t = 0) .Their long-run financial plan is to add an additional $5, 000 in each of the next 4 years (at t = 1, 2, 3, and 4) .Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7.They expect their investment account to earn 9%.How large must the annual payments at t = 5, 6, and 7 be to cover Casie's anticipated college costs?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?

Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?

Suppose a Google.com bond will pay $4, 500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?

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?

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

Suppose you inherited $275, 000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?