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Exam 4: Time Value of Money

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Question 41

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bank offers to lend you $100,000 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?

A) $7,531
B) $7,927
C) $8,323
D) $8,740
E) $9,177

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

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Question 42

Multiple Choice

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Wendy has $5,000 invested in a bank that pays 3.8% annually.How long will it take for her funds to triple?

A) 23.99
B) 25.26
C) 26.58
D) 27.98
E) 29.46

F) None of the above
G) B) and E)

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Question 43

Multiple Choice

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have a chance to buy an annuity that pays $2,500 at the end 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?

aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today.The going rate on such annuities is 7.25%.How much would it cost her to buy such an annuity today?

"growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

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

father's employer was just acquired, and he was given a severance payment of $375,000, which he invested at a 7.5% annual rate.He now plans 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at the end of each year, starting at the end of this year.What is the maximum number of whole payments that can be withdrawn before the account is exhausted; i.e., before the account balance would become negative?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 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?

Which of the following bank accounts has the lowest effective annual return?

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?

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

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

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.

grandmother just died and left you $100,000 in a trust fund that 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?

a result of compounding, the effective annual rate on a bank deposit

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

Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire.She wants to withdraw $40,000 at the beginning of each year, starting immediately.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.)

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

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

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