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Exam 28: Time Value of Money

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Question 21

Multiple Choice

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Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

A) $2,404.91
B) $2,531.49
C) $2,658.06
D) $2,790.96
E) $2,930.51

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Question 22

Multiple Choice

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You are considering two equally risky annuities,each of which pays $25,000 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?

A) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.
B) A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.
C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
E) The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

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Question 23

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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?

Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years.He could earn 4.5% on his money in other investments with equal risk.What is the most he should pay for the annuity?

What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?

Your bank account pays a 5% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

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

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?

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.

Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year.How much could you withdraw at the end of each of the next 20 years?

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.

Cyberhost Corporation's sales were $225 million last year.If sales grow at 6% per year,how large (in millions) will they be 5 years later?

You agree to make 24 deposits of $500 at the beginning of each month into a bank account.At the end of the 24^th month,you will have $13,000 in your account.If the bank compounds interest monthly,what nominal annual interest rate will you be earning?

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.

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?

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.

At a rate of 6.5%,what is the future value of the following cash flow stream?

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.

Suppose you inherited $275,000 and invested it at 8.25% per year.How much could you withdraw at the beginning of each of the next 20 years?