Exam 5: The Time Value of Money

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years?

The present value of a single payment can be represented as _____.

What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly?

Calculate the present value of the following net cash flows if the discount rate is 12%. Year Cash Flow 1-5 \ 10,000 each year 6-10 \ 15,000 each year 11-15 \ 17,000 each year

Explain a perpetuity, and list some investment vehicles that can be perpetuities.

What monthly rate of interest will yield an annual effective rate of interest of 14%?

What is the difference between the nominal interest rate and the effective interest rate?

Alabama Power has preferred stock that pays an annual dividend of $9.44. If the security has no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of return?

Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20-year period, the first payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have this annuity, if the investment will earn 12 percent compounded annually?

You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85). You are now 40 years old. How much must you save each year for the next 25 years if you assume your savings will earn 12% annually?

The present value of an ordinary annuity is the ____.

Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is your monthly payment?

John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end-of-year payments, how much total interest will he pay?

Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are expected to be 8% for the first 4 years and 10% thereafter?

Approximately how long would it take to double my money if I invest it now at 18%?

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the _____.

More frequent compounding results in ____ future values and ____ present values than does less frequent compounding at the same interest rate.

Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e., a perpetuity), assuming you require an 8 percent rate of return on this investment.

The future value of a single payment equation is given by ____.

You wish to save $500,000 in the next 25 years. You put your savings into a corporate bond fund that earns about 11 percent per year. How much must you save each year to obtain your goal?