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Exam 28: Time Value of Money

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Question 21

Multiple Choice

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

A) $28,243.21
B) $29,729.70
C) $31,294.42
D) $32,859.14
E) $34,502.10

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

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Question 22

Multiple Choice

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Which of the following statements is CORRECT?

A) if cf0 is positive and all the other cfs are negative, then you can still solve for i.
B) if you have a series of cash flows, each of which is positive, you can solve for i, where the solution value of i causes the pv of the cash flows to equal the cash flow at time 0.
C) if you have a series of cash flows, and cf0 is negative but each of the following cfs is positive, you can solve for i, but only if the sum of the undiscounted cash flows exceeds the cost.
D) to solve for i, one must identify the value of i that causes the pv of the positive cfs to equal the absolute value of the fv of the negative cfs. it is impossible to find the value of i without a computer or financial calculator.
E) if you solve for i and get a negative number, then you must have made a mistake.

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

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Question 23

Multiple Choice

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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?

A "growing annuity" is any cash flow stream that grows over time.

Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?

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.

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

Your bank offers a savings account that pays 3.5% interest, compounded annually. How much will $500 invested today be worth at the end of 25 years?

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

You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?

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%?

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?

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?

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?

Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?

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

What is the present value of the following cash flow stream at a rate of 8.0%?

Which of the following statements is CORRECT?