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

You have reviewed your budget and determine that the most you can afford on a car loan is $375 per month. What is the most you can borrow if interest rates are 8 percent and you can pay the loan over five years?

A local furniture store is advertising a deal in which you buy a $3,500 living room set with three 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 percent APR, compounded monthly, to be able to pay the $3,500 bill in three years?

What is the present value of a $775 annuity payment over six years if interest rates are 11 percent?

Compute the present value of a $2,500 deposit in year 4 and another $10,000 deposit at the end of year 8 if interest rates are 15 percent.

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

To compute the present or future value of an annuity due, one computes the value of an ordinary annuity and then:

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 5.5 percent APR interest rate. After the second year, the mortgage interest charged increases to 8.5 percent APR. What is the effective interest rate in the first two years? What is the effective interest rate after the second year?

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

Loan amortization schedules show:

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

Given a 5 percent interest rate, compute the present value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,400, $1,400, and $1,500.

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

The simple form of an annualized interest rate is called the annual percentage rate (APR). The effective annual rate (EAR) is a:

Given a 7 percent interest rate, compute the year 8 future value of deposits made in years 1, 2, 3, and 4 of $750, $1,200, $500, and $250.

Compute the future value in year 4 of a $500 deposit in year 1 and another $1,000 deposit at the end of year 3 using a 5 percent interest rate.

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

Your company borrows $275,000 today to fund its growth initiatives. It must repay the bank in five annual payments of $76,300 at the end of each year. What annual interest rate is your firm paying?

What annual interest rate would you need to earn if you wanted a $500 per month contribution to grow to $27,050 in four years?

Say that you purchase a house for $150,000 by getting a mortgage for $135,000 and paying a $15,000 down payment. If you get a 15-year mortgage with a 6 percent interest rate, what would the loan balance be in seven years?

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