Exam 5: Time Value of Money

Future Value 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.

Jane has been saving $500 in her retirement account each month for the last 20 years and plans to continue contributing $500 each month for the next 20 years.Her account has been earning an 8 percent annual interest rate and she expects to earn the same rate for the next 20 years.Her twin brother,Hal,has not saved anything for the last 20 years.Due to sibling rivalry,he wants to have as much as Jane is expected to have at the end of 20 years.If Hal expects to earn the same annual interest rate as Jane,how much must Hal save each month to achieve his goal?

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?

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 furniture company is offering a choice of deals.You can receive $100 cash back on the purchase,or a 2 percent APR,2-year loan.The price of the dining room set is $3,750 and you could obtain a 2-year loan from your credit union at 6 percent APR.What is the cost per month of each deal?

A loan is offered with monthly payments and a 14.5 percent APR.What is the loan's effective annual rate (EAR)?

Assume that you contribute $300 per month to a retirement plan for 25 years.Then you are able to increase the contribution to $500 per month for 20 years.Given a 9 percent interest rate,what is the value of your retirement plan after 45 years?

Annuity Payments and Amortization Schedule Consider Carrie asks Miranda to help with her 20 percent down payment on her apartment.Miranda is willing to loan Carrie $30,000,but she is requiring 6.5 percent interest and semi-annual payments over three years to repay the loan.Carrie wants to deduct the loan's interest from her taxes,and Miranda must show the interest income on her taxes,so they need to know how much interest is included each year in the payments.Compute the semi-annual payments and create an amortization schedule to determine the interest paid each year.

Present Value of a Perpetuity A perpetuity pays $50 per year and interest rates are 9 percent.How much would its value change if interest rates decreased to 6 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.

Investing for Retirement 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?

A car company is offering a choice of deals.You can receive $600 cash back on the purchase,or a 2 percent APR,4-year loan.The price of the car is $18,900 and you could obtain a 4-year loan from your credit union at 6 percent APR.What is the monthly payment of each deal?

Present Value Given a 7 percent interest rate,compute the present value of deposits made in years 1,2,3,and 4 of $1,000,$1,200,$1,500,and $1,500.

Present Value of an Annuity Carrie and Miranda earn the same salary.However,Miranda has been far more financially responsible.She pays her bills on time and pays off her credit card debt quickly.Carrie had been less financially responsible.She often buys too many shoes and has allowed her credit card balance to balloon.If she is short on cash for a month,she simply decides to not even pay the minimum balance due on her credit card.Now they both are looking to buy apartments.Miranda decides she can afford to make $2,500 payments,but Carrie can only make $2,000 payments and pay off her credit card debt,too.Miranda qualifies for a 6.5 percent,30-year mortgage,but because of her bad credit rating Carrie will be charged 8 percent on a 30-year mortgage.Both will put 20 percent down.How is Carrie's bad credit going to impact her apartment search?

Future Value Given a 7 percent interest rate,compute the year 6 future value if deposits of $2,500 and $1,500 are made in years 2 and 3,respectively,and a withdrawal of $900 is made in year 4.

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?

You started your first job after graduating from college.Your company offers a retirement plan for which the company contributes 50 percent of what you contribute each year.You expect to contribute $2,000 per year from your salary.You decide to invest the contributions in assets that you expect to earn 10 percent per year.If you plan to retire in 40 years,how big will you expect that retirement account to be?

You started your first job after graduating from college.Your company offers a retirement plan for which the company contributes 25 percent of what you contribute each year.You expect to contribute $5,000 per year from your salary.You decide to invest the contributions in assets that you expect to earn 8 percent per year.If you plan to retire in 35 years,how big will you expect that retirement account to be?

Low Financing or Cash Back A car company is offering a choice of deals.You can receive $2,000 cash back on the purchase,or a 2 percent APR,3-year loan.The price of the car is $17,000 and you could obtain a 3-year loan from your credit union,at 7 percent APR.Which deal is cheaper?

Future Value of an Annuity What is the future value of a $1,000 annuity payment over 4 years if the interest rates are 8 percent?