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Exam 4: Time Value of Money

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Question 61

Multiple Choice

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

A) $1,819
B) $1,915
C) $2,016
D) $2,117
E) $2,223

F) C) and D)
G) B) and E)

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Question 62

Multiple Choice

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Suppose a Google.com bond will pay $4,500 ten years from now.If the going interest rate on safe 10-year bonds is 4.25%,how much is the bond worth today?

A) $2,819.52
B) $2,967.92
C) $3,116.31
D) $3,272.13
E) $3,435.74

F) B) and E)
G) B) and C)

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Question 63

Multiple Choice

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Which of the following statements is CORRECT?

A salt mine you inherited will pay you $25,000 per year for 25 years,with the first payment being made today.If you think a fair return on the mine is 7.5%,how much should you ask for it if you decide to sell it?

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Which of the following statements is CORRECT?

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.

Your investment account pays 8.0%,compounded annually.If you invest $5,000 today,how many years will it take for your investment to grow to $9,140.20?

Julian and Jonathan are twin brothers (and so were born on the same day) .Today,both turned 25.Their grandfather began putting $2,500 per year into a trust fund for Julian 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 Julian's 65th birthday.The grandfather set things up this way because he wants Julian to work,not be a "trust fund baby," but he also wants to ensure that Julian is provided for in his old age. Until now,the grandfather has been disappointed with Jonathan and so has not given him anything.However,they recently reconciled,and the grandfather decided to make an equivalent provision for Jonathan.He will make the first payment to a trust for Jonathan today,and he has instructed his trustee to make 40 additional equal annual payments until Jonathan 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 Jonathan's trust today and each subsequent year to enable him to have the same retirement nest egg as Julian after the last payment is made on their 65th birthday?

Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%,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?

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%,how much is the bond worth today?

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

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?

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%?

Of the following investments,which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.

You were left $100,000 in a trust fund set up by your grandfather.The fund pays 6.5% interest.You must spend the money on your college education,and you must withdraw the money in 4 equal installments,beginning immediately.How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?

Brockman Corporation's earnings per share were $3.50 last year,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 Brockman's EPS to triple?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Your aunt has $500,000 invested at 5.5%,and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year,beginning immediately.When she makes her last withdrawal (at the beginning of a year) ,she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year,your withdrawal is at the end of that same year) .What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer,round down to the nearest whole number. )