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Exam 4: Time Value of Money

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Question 71

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 72

Multiple Choice

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Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

A) The outstanding balance declines at a faster rate in the later years of the loan's life.
B) The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.
C) Because the outstanding balance declines over time, the monthly payments will also decline over time.
D) Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.
E) The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

F) B) and C)
G) A) and C)

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Question 73

Multiple Choice

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Which of the following statements is CORRECT?

If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today.You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?

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

Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually.If you invest $2,000 in the CD, how much will you have when it matures?

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

What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?

Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today.You need money today to open a new restaurant, and your uncle offers to give you $120,000 for the annuity.If you sell it, what rate of return would your uncle earn on his investment?

The going rate of interest on a 5-year treasury bond is 4.25%.You have one that will pay $2,500 five years from now.How much is the bond worth today?

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.

Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum.If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?

Which of the following statements is CORRECT?

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

An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him 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 him to buy such an annuity today?

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?

You sold your motorcycle and accepted a note with the following cash flow stream as your payment.What was the effective price you received for the car assuming an interest rate of 6.0%?

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

If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.