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

Monica has decided that she wants to build enough retirement wealth that, if invested at 7 percent per year, will provide her with $3,000 monthly income for 30 years. To date, she has saved nothing, but she still has 20 years until she retires. How much money does she need to contribute per month to reach her goal?

What is the present value of a $250 deposit in year 1, and another $50 deposit at the end of year 6 if interest rates are 10 percent?

You have reviewed your budget and determine that the most you can afford on a car loan is $455 per month. What is the most you can borrow if interest rates are 7 percent and you can pay the loan over four years?

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 two years and then $3,000 per month for another two years after that. If the bank is charging customers 6.5 percent APR, how much would it be willing to lend the business owner?

Your company borrows $55,000 today to fund its growth initiatives. It must repay the bank in four annual payments of $17,100 at the end of each year. What annual interest rate is your firm paying?

A mortgage broker is offering a $225,000 30-year mortgage with a teaser rate. In the first two years of the mortgage, the borrower makes monthly payments on only a 2.5 percent APR interest rate. After the second year, the mortgage interest rate charged increases to 8.5 percent APR. What are the mortgage payments in the first two years? What are the mortgage payments after the second year?

Given an 8 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $900, $800, $700, and $600.

The present value of annuity payments made far into the future is

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 percent! If he pays $175 per month on the card, in total, how much interest expense does Ricky pay to the credit card company?

Chase purchased a $23,000 car three years ago using a 14 percent, 6-year car loan. He has decided that he would sell the car now if he could get a price that would pay off the balance of his loan. What is the minimum price Chase would need to receive for his car? (Assume monthly payments.)

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

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