Exam 5: Time Value of Money 2: Analyzing Annuity Cash Flows

Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in 5 years?

If you start making $115 monthly contributions today and continue them for 6 years, what is their present value if the compounding rate is 12% APR? What is the present value of this annuity?

Present Value of an Annuity Carrie and Miranda earn the same salary. However, Miranda has been far more financially responsible. She pays her bills on time and pays off her credit card debt quickly. Carrie had been less financially responsible. She often buys too many shoes and has allowed her credit card balance to balloon. If she is short on cash for a month, she simply decides to not even pay the minimum balance due on her credit card. Now they both are looking to buy apartments. Miranda decides she can afford to make $2,500 payments, but Carrie can only make $2,000 payments and pay off her credit card debt, too. Miranda qualifies for a 6.5%, 30-year mortgage, but because of her bad credit rating Carrie will be charged 8% on a 30-year mortgage. Both will put 20% down. How is Carrie's bad credit going to impact her apartment search?

Future and Present Value of an Annuity Due If you start making $25 monthly contributions today and continue them for 4 years, what's their future value if the compounding rate is 6 percent APR? What is the present value of this annuity?

How might credit card companies keep their cardholders in debt for a long time?

Present Value of a Perpetuity A perpetuity pays $50 per year and interest rates are 9 percent. How much would its value change if interest rates decreased to 6 percent?

Level sets of frequent, consistent cash flows are called

Present Value Given a 6 percent interest rate, compute the present value of deposits made in years 1, 2, 3, and 4 of $1,200, $1,400, $1,400, and $1,500.

Number of Annuity Payments Phoebe realizes that she has charged too much on her credit card and has racked up $7,000 in debt. If she can pay $200 each month and the card charges 17 percent APR (compounded monthly), how long will it take her to pay off the debt?

Future Value Compute the future value in year 4 of a $500 deposit in year 1 and another $1,000 deposit at the end of year 3 using a 5% interest rate.

Given a 7% interest rate, compute the year 8 future value of deposits made in years 1, 2, 3, and 4 of $750, $1,200, $500, and $250.

A perpetuity pays $250 per year and interest rates are 5.5%. How much would its value change if interest increased to 8.5%? Did the value increase or decrease?

Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $500 per month contribution to grow to $27,050 in 4 years?

A loan is offered with monthly payments and a 14.5% APR. What is the loan's effective annual rate (EAR)?

Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. Assume you get a 15-year mortgage with a 6% interest rate. If the house appreciates at a 2% rate per year, what will be the value of the house in 7 years? How much of this value is equity?

Future Value of Multiple Annuities Assume that you contribute $100 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $200 per month for another 20 years. Given a 6 percent interest rate, what is the value of your retirement plan after 40 years?

Loan Payments You wish to buy a $20,000 car. The dealer offers you a 3-year loan with an 8 percent APR. What are the monthly payments? How would the payment differ if you paid interest only? What would the consequences of such a decision be?

Present Value of an Annuity What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

Your 30-year $95,000 mortgage calls for payments to be made at the end of each month. The loan has a 5.85% annual interest rate. What is the remaining balance after 5 years?

Present Value of an Annuity What is the present value of a $300 annuity payment over 5 years if interest rates are 8 percent?