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Exam 4: Time Value of Money

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Question 21

True/False

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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.

A) True
B) False

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Question 22

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What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

A) $8,956.56
B) $9,427.96
C) $9,924.17
D) $10,446.50

E) All of the above
F) A) and B)

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Question 23

Multiple Choice

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Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding and a 360-day year.How much could you withdraw after 8 months,assuming each month has 30 days?

Pace Co.borrowed $25,000 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 Pace have to pay in a 30-day month?

You want to go to Europe 5 years from now,and you can save $3,100 per year,beginning immediately.You plan to deposit the funds in a mutual fund that you expect to return 8.5% per year.Under these conditions,how much will you have just after you make the fifth deposit,5 years from now?

By law,credit card issuers must print the annual percentage rate (APR) on their monthly statements.If the APR is stated to be 18.00%,with interest paid monthly,what is the card's EFF percentage?

The payment made each period on an amortized loan is constant,and it consists of some interest and some principal.The closer we are to the end of the loan's life,the greater the percentage of the payment that will be a repayment of principal.

Which of the following statements regarding a 15-year (180-month) $125,000 fixed-rate mortgage is NOT correct? (Ignore all taxes and transaction costs.)

Which of the following statements is NOT correct?

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

You have a chance to buy 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?

An investment costs $725 and is expected to produce cash flows of $75 at the end of Year 1,$100 at the end of Year 2,$85 at the end of Year 3,and $625 at the end of Year 4.What rate of return would you earn if you bought this investment?

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

You anticipate that you will need $1,500,000 when you retire 30 years from now.You plan to make 30 deposits,beginning today,in a bank account that will pay 6% interest,compounded annually.You expect to receive annual raises of 4%,so you will increase the amount you deposit each year by 4%.(That is,your second deposit will be 4% greater than your first,the third will be 4% greater than the second,etc.) How much must your first deposit be if you are to meet your goal?

Which investment will have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same.

As a result of compounding,the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

A $50,000 loan is to be amortized over 7 years,with annual end-of-year payments.Which of these statements is correct?

Suppose you borrowed $12,000 at a rate of 9% and must repay it in 4 equal installments at the end of each of the next 4 years.How much interest would you have to pay in the first year?

You own an oil well that will pay you $30,000 per year for 10 years,with the first payment being made today.If you think a fair return on the well is 8.5%,how much should you ask for if you decide to sell it?

How many years would it take $50 to triple if it were invested in a bank that pays 3.8% per year?