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Exam 4: Time Value of Money

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Question 51

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Suppose you are buying your first house for $210,000, and are making a $20,000 down payment. You have arranged to finance the remaining amount with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate. What will your equal monthly payments be?

A) $1,083.84
B) $1,140.88
C) $1,200.93
D) $1,260.98

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

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Question 52

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

A) True
B) False

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Question 53

Multiple Choice

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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%?

Last year Mason Corp's earnings per share were $2.50, 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 Mason's EPS to double?

You are considering two equally risky annuities, each of which pays $5,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following 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 large would your payments be?

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?

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

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

If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

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

Suppose the Government of Canada offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

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

If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

Which of the following investments will have the HIGHEST FUTURE VALUE at the end of 10 years? Assume that the effective annual rate for all investments is the same.

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 6.5%?

All other factors held constant, the present value of a given annual annuity decreases as the number of discounting periods per year increases.

Suppose a bank offers to lend you $10,000 for one year at a nominal annual rate of 10.25%, but you must make interest payments at the end of each QUARTER and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

What would the future value of $125 be after 8 years at 8.5% compound interest?