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

Jasmine has decided that she wants to build enough retirement wealth that, if invested at 6% per year, will provide her with $3,000 of monthly income for 30 years. To date, she has saved nothing but she still has 25 years until she retires. Jasmine believes that she can earn 9% on her investments until she retires. How much money does she need to contribute per month to reach her goal?

Your company borrows $75,000 today to fund its growth initiatives. It must repay the bank in 4 annual payments of $26,600 at the end of each year. What annual interest rate is your firm paying?

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

People refinance their home mortgages

When you get your credit card bill, if you make a payment larger than the minimum payment

What annual interest rate would you need to earn if you wanted a $1,250 per month contribution to grow to $65,000 in 3 years?

Given a 10% interest rate, compute the year 9 future value if deposits of $10,000 and $20,000 are made in years 1 and 5 respectively, and a withdrawal of $5,000 is made in year 7.

Present Value of a Perpetuity What's the present value, when interest rates are 6.5 percent, of a $100 payment made every year forever?

A local furniture store is advertising a deal in which you buy a $3,500 living room set with 3 years before you need to make payments (no interest is incurred). How much money would have to deposit now in a savings account earning 3.5% APR, compounded monthly, to pay the $3,500 bill in three years?

After saving diligently your entire career, you and your spouse are ready to retire with a nest egg of $500,000. You need to invest this money in a mix of stocks and bonds that will allow you to earn $4,000 per month for 30 years. What annual interest rate (APR) do you need to earn?

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 percent APR interest rate. After the second year, the mortgage interest charged increases to 8 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

Isaac realizes that he charged too much on his credit card and has racked up $5,000 in debt. If he can pay $225 each month and the card charges 17.55% APR (compounded monthly), how long will it take him to pay off the credit card?

As a college student, you probably receive many credit card offers in the mail. Consider these two offers. The first card charges a 17% APR. An examination of the footnotes reveals that this card compounds monthly. The second credit card charges 16.25% APR and compounds weekly. What is the effective annual rate of the cheaper card?

Your client has been given a trust fund valued at $1 million. She cannot access the money until she turns 68 years old, which is in 12 years. At that time, she can withdraw $30,000 per month. If the trust fund is invested at a 7% interest rate, how many months will it last your client once she starts to withdraw the money?

Future Value Given a 4 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,400.

Your firm needs to buy additional physical therapy equipment that costs $27,000. The equipment manufacturer will give you the equipment now if you will pay $7,000 per year for the next 5 years. Assume your firm can borrow at a 13% interest rate. You need to analyze if your firm should pay the manufacturer the $27,000 now or accept the five-year annuity offer of $7,000. Which of the following statements is correct?

Jane has been saving $500 in her retirement account each month for the last 20 years and plans to continue contributing $500 each month for the next 20 years. Her account has been earning an 8% 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?

A local furniture store is advertising a deal in which you buy a $3,500 living room set with 3 years before you need to make payments (no interest is incurred). How much would you have to deposit each month in a savings account earning 3.5% APR, compounded monthly, to be able to pay the $3,500 bill in three years?

You are deciding among several different bank accounts. Which of the following will generate the highest effective annual rate (EAR)?

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