Exam 5: The Time Value of Money

How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an account that is paying a nominal 12 percent per year, compounded monthly?

An insurance company offers you an end-of-year annuity of $48,000 per year for the next 20 years. They claim your return on the annuity is 9 percent. What should you be willing to pay today for this annuity?

Nukin' Gnats Pest Control wants to offer a contract to its customers that would protect the property of their existing customers against termite infestation. Should termites invade a customer's home, Nukin' Gnats will pay for the repairs to the home provided the customer has maintained service with Nukin' Gnats. The corporation must develop an account with a value of $500,000. They will accumulate this account over three years, after which they will offer this new contract provision. How much must be deposited annually (rounded amount) to accumulate the needed funds if they can get 5% interest at their local bank?

Keith Stone has a 10-year-old daughter, Kate, who will be entering college in 8 years. Keith estimates college costs to be $16,000, $17,000, $18,000, and $19,000 payable at the beginning of each of Kate's four years in college. How much must Keith save each year (assume end-of-year payments) for each of the next 8 years to have enough savings to pay for Kate's education? Assume Keith can earn 9% on his savings.

An annuity that begins more than 1 year in the future is referred to as a(n) ____.

Based on the Rule of 72, what interest rate do you need to earn to double your money in 6 years?

If you invest the $10,000 you receive at graduation (age 22) in a mutual fund that averages a 12% annual return, how much will you have at retirement in 40 years?

The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine-year time period. Determine the compound annual growth rate.

Annuity due calculations are common when dealing with _____.

In six years, your daughter will be going to college. You wish to have a fund that will provide her $10,000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years?

The difference between an ordinary annuity and an annuity due is the _____.

Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual effective rate of interest you are being charged on your credit card?

When using a financial calculator, PV stands for the ____.

Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40-year working life and then retire. What will Billy have if the account will earn 10 percent compounded annually?

Seebee makes quarterly (end-of-period) payments of $30,000 into a pension fund earning 12 percent per year compounded quarterly for 10 years. How much interest will it have earned in 10 years?

Explain the concept of interest and compare it to rate of interest.

Finding the discounted current value of $1,000 to be received at the end of each of the next 5 years requires calculating the ____.

You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the rate of return on your investment?

The more frequent the compounding, the _____.

You have just won a $50,000 bond that pays no interest and matures in 20 years. If the discount rate is 10%, what is the present value of your bond?