Exam 5: Time Value of Money

Jane has been saving $200 in her retirement account each month for the last 20 years and plans to continue contributing $200 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?

You have secured a loan from your bank for two years to build your home.The terms of the loan are that you will borrow $120,000 now and an additional $52,000 in one year.Interest of 9 percent APR will be charged on the balance monthly.Since no payments will be made during the 2-year loan,the balance will grow.At the end of the two years,the balance will be converted to a traditional 30-year mortgage at a 6.5 percent interest rate.What will you pay as monthly mortgage payments (principal and interest only)?

Your credit rating and current economic conditions will determine:

Bank A charges a 7.50 percent annual percentage rate and interest is due at the end of the year.Bank B charges a 6.95 percent annual percentage rate and interest must be paid monthly.What is the effective annual rate charged by each bank?

After saving diligently your entire career,you and your spouse are ready to retire with a nest egg of $500,000.You need to invest this money in a mix of stocks and bonds that will allow you to earn $4,000 per month for 30 years.What annual interest rate (APR)do you need to earn?

Loan Payments You wish to buy a $15,000 car.The dealer offers you a 4-year loan with a 9 percent APR.What are the monthly payments?

You have reviewed your budget and determine that the most you can afford on a car loan is $550 per month.What is the most you can borrow if interest rates are 6 percent and you can pay the loan over three years?

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

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

Many people who want to start investing for their future want to start today,which implies an annuity stream that is paid at the beginning of the period.Beginning-of-period cash flows are referred to as:

Isaac realizes that he charged too much on his credit card and has racked up $7,000 in debt.If he can pay $275 each month and the card charges 17.55 percent APR (compounded monthly),how long will it take him to pay off the credit card? How much interest expense will Isaac pay during this time?

Present Value of Multiple Annuities A small business owner visits his bank to ask for a loan.The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per month for the two years after that.If the bank is charging customers 5.5 percent APR,how much would it be willing to lend the business owner?

Future Value of an Annuity Due If the future value of an ordinary,7-year annuity is $10,000 and interest rates are 4 percent,what is the future value of the same annuity due?

Present Value Given a 6 percent interest rate,compute the present value of deposits made in years 1,2,3,and 4 of $1,200,$1,400,$1,400,and $1,500.

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 are the monthly payments?

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

You just bought a new home and have a 30-year mortgage with monthly payments.Which statement regarding your mortgage is correct?

Bank A charges a 7.75 percent annual percentage rate and interest is due at the end of the year.Bank B charges a 7 percent annual percentage rate and interest must be paid monthly.What is the effective annual rate charged by each bank?

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?

Which of the following statements is correct?