Exam 4: Time Value of Money 1: Analyzing Single Cash Flows

Solving for Rates You invested $5,000 in the stock market one year ago. Today, the investment is valued at $4,500. What return did you earn? What return would you need to get next year to break even overall?

Interest-on-Interest Consider a $500 deposit earning 5 percent interest per year for 5 years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

General TVM Ten years ago, Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now). James can made a twenty year investment today and lock in a 6 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

What is the value in year 4 of a $9,000 cash flow made in year 13 if interest rates are 7% in years 4 through 9 and increase to 11% after that?

How are future values affected by changes in interest rates?

What is the future value of $2000 deposited for one year earning 6% interest rate annually?

What would be more valuable, receiving $1,895 today or receiving $3,450 in six years if interest rates are 8%?

Moving Cash Flows What is the value in year 5 of a $600 cash flow made in year 10 when interest rates are 5 percent?

Scenario A: At age 27, you invest $1,500 that earns 9% each year. Scenario B: At age 40, you invest $2,500 that earns 11% per year. Under which scenario do you accumulate more money by age 60?

Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?

Scenario A: At age 19 you invest $1,500 that earns 8% per year. Scenario B: At age 30 you invest $1,500 that earns 13% per year. Under which scenario would you have more money at age 55 and what is the dollar difference at age 55 between the two scenarios?

Rates over One Year Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Interest-on-Interest Consider a $2,000 deposit earning 6 percent interest per year for 5 years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

Explain how discounting is the reverse of compounding.

You borrow $3,500 and will pay back the entire amount in 5 years. You are charged 9% interest per year. How much interest do you pay on this loan?

You want to retire in 25 years and you have just inherited $300,000. You believe you will need $1,450,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

What would be more valuable, receiving $1,000 today or receiving $3,000 in 10 years when interest rates are 8 percent? Why?

You invested $1,400 in the stock market one year ago. Today the investment is valued at $1,100. What return did you earn? What return would you need to get back next year to break even overall?

Assume that you borrow $2000 from your sister and that you will pay her back in one lump sum. She charges you 9% interest in year 1 and increases the rate by 1% per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?

Rule of 72 Approximately what interest rate is needed to double an investment over 4 years?