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

Due to poor spending habits, Ricky has accumulated $10,000 in credit card debt. He has missed several payments and now the annual interest rate on the card is 18.95%! If he pays $175 per month on the card, in total, how much interest expense does Ricky pay to the credit card company?

Compute the present value of a $2,500 deposit in year 4 and another $10,000 deposit at the end of year 8 if interest rates are 15%.

Which of the following will decrease the present value of an annuity?

When you get your credit card bill, it will offer a minimum payment, which

Present Value Given a 4 percent interest rate, compute the present value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,400.

Future Value of an Annuity Due If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what's the future value of the same annuity due?

Compound Frequency Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $250 in two weeks. What is the compound annual rate implied by this 25 percent rate charged for only two weeks?

Teaser Rate Mortgage A mortgage broker is offering a 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 5.5 percent APR interest rate. After the second year, the mortgage interest charged increases to 8.5 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

Due to poor spending habits, Ricky has accumulated $10,000 in credit card debt. He has missed several payments and now the annual interest rate on the card is 18.95%! If he pays $175 per month on the card, how long will it take Ricky to pay off the card?

Loan amortization schedules show

Your firm needs to buy additional physical therapy equipment that costs $35,000. The equipment manufacturer will give you the equipment now if you will pay $8,000 per year for the next 5 years. Assume your firm can borrow at a 3% interest rate. You need to analyze if your firm should pay the manufacturer the $35,000 now or accept the five-year annuity offer of $8,000. Which of the following statements is correct?

You deposit $1,000 today and want to save $100 each month beginning one month from today. Your account earns a 5% annual interest rate. How long will it take you to accumulate $5,000?

Future Value of an Annuity What is the future value of a $1,000 annuity payment over 4 years if the interest rates are 8 percent?

Future Value Given an 8 percent interest rate, compute the year 7 future value if deposits of $1,500 and $2,500 are made in years 2 and 3, respectively, and a withdrawal of $2,000 is made in year 5.

Annuity Payments and Amortization Schedule Consider Carrie asks Miranda to help with her 20% down payment on her apartment. Miranda is willing to loan Carrie $30,000, but she is requiring 6.5% interest and semi-annual payments over three years to repay the loan. Carrie wants to deduct the loan's interest from her taxes, and Miranda must show the interest income on her taxes, so they need to know how much interest is included each year in the payments. Compute the semi-annual payments and create an amortization schedule to determine the interest paid each year.

Jane has been saving $450 in her retirement account each month for the last 20 years and plans to continue contributing $450 each month for the next 20 years. Her account has been earning a 9% annual interest rate and she expects to earn the same rate for the next 20 years. Her twin brother, Hal, has not saved anything for the last 20 years. Due to sibling rivalry, he wants to have as much as Jane is expected to have at the end of 20 years. If Hal expects to earn the same annual interest rate as Jane, how much must Hal save each month to achieve his goal?

You started your first job after graduating from college. Your company offers a retirement plan for which the company contributes 25% of what you contribute each year. You expect to contribute $5,000 per year from your salary. You decide to invest the contributions in assets that you expect to earn 8% per year. If you plan to retire in 35 years, how big will you expect that retirement account to be?

You started your first job after graduating from college. Your company offers a retirement plan for which the company contributes 50% of what you contribute each year. You expect to contribute $4,000 per year from your salary. You decide to invest the contributions in assets that you expect to earn 8% per year. If you plan to retire in 35 years, how big will you expect that retirement account to be?

A small business owner visits his bank to ask for a loan. The owner states that she can repay a loan at $2,500 per month for the next 2 years and then $3,000 per month for another 2 years after that. If the bank is charging customers 6.5% APR, how much would it be willing to lend the business owner?

What is the present value of a $775 annuity payment over 6 years if interest rates are 11%?