Exam 5: The Time Value of Money

A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar).

Air Atlantic (AA) has been offered a 3-year-old jet airliner under a 12-year lease arrangement. The lease requires AA to make annual lease payments of $500,000 at the beginning of each of the next 12 years. Determine the present value of the lease payments if the opportunity cost of funds is 14 percent.

Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident. What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%.

Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer?

What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years?

The amount of simple interest is equal to the product of the principal times ____ times ____.

Jackie plans to open her own bookstore in 10 years. To raise the "seed" money, she has committed the $10,000 she now has in a mutual fund. In addition, she plans to save $2,000 per year (end of year) for the next 5 years and $3,000 per year (end of year) for the following 5 years. How much "seed" money will Jackie have in 10 years if the investments earn 10 percent per year compounded annually?

When using a present value of an annuity table (e.g., Table IV at the back of the book), _____.

What is (are) the difference(s) between simple interest and compound interest?

Annuity due calculations are especially important when dealing with ____.

Idlewild Bank has granted you a seven-year loan for $50,000. If your seven annual end-of-the-year payments are $11,660.45, what is the rate of interest Idlewild is charging?

The annual effective rate of interest (i_eff) is a function of _____.