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Exam 5: Time Value of Money

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Question 61

Multiple Choice

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Master Card and other credit card issuers must by law 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%?

A) 18.58%
B) 19.56%
C) 20.54%
D) 21.57%
E) 22.65%

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

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Question 62

True/False

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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 smaller the percentage of the payment that will be a repayment of principal.

A) True
B) False

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Question 63

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.

John and Daphne are saving for their daughter Ellen's college education.Ellen 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 years⎯if 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,John and Daphne 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 Ellen's anticipated college costs?

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

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?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

A time line is meaningful even if all cash flows do not occur annually.

You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

When a loan is amortized,a relatively high percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage declines in the loan's later years.

Last 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?

Steve and Ed are cousins who were both born on the same day,and both turned 25 today.Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday,and he just made a 6th payment into the fund.The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve's 65th birthday.The grandfather set things up this way because he wants Steve to work,not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age. ​ Until now,the grandfather has been disappointed with Ed,hence has not given him anything.However,they recently reconciled,and the grandfather decided to make an equivalent provision for Ed.He will make the first payment to a trust for Ed today,and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65,when the 41st and final payment will be made.If both trusts earn an annual return of 8%,how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

Which of the following statements is CORRECT?

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years.How much interest would you have to pay in the first year?

Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest,compounded annually.How much will you have when the CD matures?

You want to quit your job and go back to school for a law degree 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?

You want to buy a new sports car 3 years from now,and you plan to save $4,200 per year,beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit,3 years from now?

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?