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Exam 4: Time Value of Money

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Question 31

True/False

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

A) True
B) False

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Question 32

Multiple Choice

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Your investment advisor has recommended your invest in bonds that pay 6.0%,compounded annually.If you invest $10,000 today,how many years will it take for your investment to grow to $30,000?

A) 12.37
B) 13.74
C) 15.27
D) 16.97
E) 18.85

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

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Question 33

Multiple Choice

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Which of the following statements is CORRECT?

Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments.What percentage of the 2nd monthly payment will go toward the repayment of principal?

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you,DeVille will pay $2,500 at the end of Year 1,$5,000 at the end of Year 2,and $7,500 at the end of Year 3,plus a fixed but currently unspecified cash flow,X,at the end of each year from Year 4 through Year 7.You are confident the payments will be made,since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years,that is,what is X?

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

How much would $1,growing at 3.5% per year,be worth after 75 years?

You are hoping to buy a new boat 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?

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

Your aunt wants to retire and has $375,000.She expects to live for another 25 years and to earn 7.5% on her invested funds.How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?

Now that your uncle has decided to retire,he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years,with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Which of the following statements is CORRECT?

You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

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 smaller the present value of a given lump sum to be received at some future date.

Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

Your 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?

What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%,compounded semiannually?

Your 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. )

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.