Exam 5: The Time Value of Money

When solving time value of money problems on a financial calculator,you must select the "end mode" when you enter the final years cash flow.

You deposit $5,000 per year at the end of each of the next 25 years into an account that pays 8% compounded annually.How much could you withdraw at the end of each of the 20 years following your last deposit if all withdrawals are the same dollar amount? (The twenty-fifth and last deposit is made at the beginning of the 20-year period.The first withdrawal is made at the end of the first year in the 20-year period.)

To compound $100 quarterly for 20 years at 8%,we must use

Your parents are complaining about the price of items today compared to what they cost years ago.If an automobile that cost $12,000 in 1980 costs $40,000 in 2010,calculate the annual growth rate in the automobile's price.

Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments at the end of each of the next 5 years.Joe's payment will be $2,100 [($10,000/5)+ ($10,000 × 10%).

Artificially low interest rates helped create the housing bubble because low interest rates (r value)create higher values (higher PVs).

A bond maturing in 10 years pays $80 each year (including year 10)and $1,000 upon maturity.Assuming 10 percent to be the appropriate discount rate,the present value of the bond is:

The price of a computer today is $400 and inflation is 5% per year.Therefore,in two years the price of the computer is expected to be $440.

Your grandparents deposit $2,000 each year on your birthday,starting the day you are born,in an account that pays 7% interest compounded annually.How much will you have in the account on your 21st birthday,just after your grandparents make their deposit?

A retirement plan guarantees to pay you or your estate a fixed amount for 25 years.At the time of retirement you will have $100,000 to your credit in the plan.The plan anticipates earning 7% interest annually over the period you receive benefits.How much will your annual benefits be assuming the first payment occurs one year from your retirement date?

You have contracted to buy a house for $250,000,paying $30,000 down and taking out a fully amortizing loan for the balance,at a 5.7% annual rate for 30 years.What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?

When using a financial calculator,cash outflows generally have to be entered as negative numbers,because a financial calculator sees money "leaving your hands."

Frank Zanca is considering three different investments that his broker has offered to him.The different cash flows are as follows: Because Frank only has enough savings for one investment,his broker has proposed the third alternative to be,according to his expertise,"the best in town." However,Frank questions his broker and wants to calculate the present value of each investment.Assuming a 15% discount rate,what is Frank's best alternative?

The same underlying formula is used for computing both the future value and present value.

What is the present value of $15,500 to be received 12 years from today? Assume a discount rate of 7.5% compounded annually and round to the nearest $1.

The future value of an annuity will increase if the interest rate goes up,but the present value of the same annuity will decrease as the interest rate goes up.

Bill and Cathy will be retiring in fifteen years and would like to buy an Italian villa.The villa costs $500,000 today,and housing prices in Italy are expected to increase by 6% per year.Bill and Cathy want to make fifteen equal annual payments into an account,starting today,so there will be enough money to purchase the villa in fifteen years.If the account earns 10% per year,what is the amount of each deposit?

An investment will pay $500 in three years,$700 in five years and $1000 in nine years.If your opportunity rate is 6%,what is the present value of this investment?

When solving a problem involving an annuity due,you must select the "beg" or beginning mode on your financial calculator.

You are currently 25 years of age.You have developed a lifetime budget that includes $50,000 at age 40 for a college fund for your kids and $25,000 per year for 20 years to supplement your retirement,the first payment on your 60^th birthday and the last payment on your 79^th birthday.You open an investment account on your 25^th birthday that promises to pay 9% interest compounded annually.You want to deposit equal annual amounts into the account every year on your birthday,starting today (your 25^th birthday)and continuing until you are 40 years old (i.e.,the last deposit is made on your 40^th birthday).How much will each deposit have to be if you want to meet your financial goals?