Exam 6: Discounted Cash Flow Valuation

Which of the following statements related to interest rates are correct? I.Annual interest rates consider the effect of interest earned on reinvested interest payments. II.When comparing loans,you should compare the effective annual rates. III.Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. IV.Annual and effective interest rates are equal when interest is compounded annually.

You are looking at a one-year loan of $10,000.The interest rate is quoted as 8 percent plus 5 points.A point on a loan is simply 1 percent (one percentage point)of the loan amount.Quotes similar to this one are very common with home mortgages.The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest.What is the actual rate you are paying on this loan?

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?

Miley expects to receive the following payments: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000.All of this money will be saved for her retirement.If she can earn an average of 10.5 percent on her investments,how much will she have in her account 25 years after making her first deposit?

Blackwell,Inc.has a $75,000 liability it must pay three years from today.The company is opening a savings account so that the entire amount will be available when this debt needs to be paid.The plan is to make an initial deposit today and then deposit an additional $15,000 each year for the next three years,starting one year from today.The account pays a 4.5 percent rate of return.How much does the firm need to deposit today?

You are considering an annuity which costs $160,000 today.The annuity pays $17,500 a year at an annual interest rate of 7.50 percent.What is the length of the annuity time period?

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

You plan on saving $5,200 this year,nothing next year,and $7,500 the following year.You will deposit these amounts into your investment account at the end of each year.What will your investment account be worth at the end of year three if you can earn 8.5 percent on your funds?

You are considering two annuities,both of which pay a total of $20,000 over the life of the annuity.Annuity A pays $2,000 at the end of each year for the next 10 years.Annuity B pays $1,000 at the end of each year for the next 20 years.Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain.

You borrow $165,000 to buy a house.The mortgage rate is 4.5 percent and the loan period is 30 years.Payments are made monthly.If you pay the mortgage according to the loan agreement,how much total interest will you pay?

A preferred stock pays an annual dividend of $3.20.What is one share of this stock worth today if the rate of return is 11.75 percent?

On the day you entered college you borrowed $30,000 from your local bank.The terms of the loan include an interest rate of 4.75 percent.The terms stipulate that the principal is due in full one year after you graduate.Interest is to be paid annually at the end of each year.Assume that you complete college in four years.How much total interest will you pay on this loan?