Exam 14: The Effects of Time and Risk on Value

With compound interest,the investor earns interest on the principal amount invested plus interest on accumulated interest.Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

Suppose that an industrial building can be purchased today for $2,500,000.If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year)and can be sold at the end of the fifth year for $2,800,000,what is the internal rate of return (IRR)on this investment?

Since investors prefer to have money now rather than later,money received next week,instead of today,is not worth as much to those receiving it,assuming the magnitude of the cash flow in each period is the same.Therefore an adjustment to the prospective cash flows is required.This process is referred to as:

Suppose a bank decides to make a mortgage loan to an individual so that they may purchase a home.The homeowner will pay the bank $1500 per month in mortgage payments for the next 30 years.The bank will collect the mortgage payments at the end of the month.What is this promised stream of cash flows worth to the bank today if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon?

Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased.If investors require a higher rate of return for undertaking more risk,the underlying assumption is that investors are:

When discussing time-value-of-money it is necessary to understand some key terminology.Which of the following terms refers to a fixed amount of money paid or received at the end of every period (i.e.a series of equal lump sums)?

Suppose you are starting a Ph.D.program with only $1,000 in your savings account.The university has agreed to waive your tuition,cover all of your living expenses,and pay you an additional stipend of $2,000 at the beginning of each month,as long as you teach one course per semester over the course of five years.If your savings account is able to earn 5.5% per year for the five years that you will be in this program,how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis?

Suppose that a landlord is interested in renting out a two-bedroom apartment for $1000 a month for the next year.The landlord requires rent to be paid at the beginning of the month,at which point he will deposit the rental check into a local savings account.If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly,how much will the tenant have in his savings account at the end of the year?

Upon starting his first job after graduation,Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account.After taxes,medical benefits,and retirement account contributions have been taken out of John's gross salary,he is left with a direct deposit of $4000 at the end of each month.If John started with no other savings in his account,how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%,with interest being compounded monthly?

Assuming that an investor requires a 10% annual yield over the next 12 years,how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years.If you wish to determine the present value of these future cash flows (i.e.the value of this cash flow stream to you today),you would use which of the following time value of money processes?