Exam 5: Time Value of Money

Isaac realizes that he charged too much on his credit card and has racked up $5,000 in debt.If he can pay $225 each month and the card charges 17.55 percent APR (compounded monthly),how long will it take him to pay off the credit card?

As a college student,you probably receive many credit card offers in the mail.Consider these two offers.The first card charges a 17 percent APR.An examination of the footnotes reveals that this card compounds daily (365 day year).The second credit card charges 18 percent APR and compounds semiannually.What is the effective annual rate of the cheaper card?

Chase purchased a $23,000 car three years ago using a 14 percent,6-year car loan.He has decided that he would sell the car now if he could get a price that would pay off the balance of his loan.What is the minimum price Chase would need to receive for his car? (Assume monthly payments.)

Compound Frequency Payday loans are very short-term loans that charge very high interest rates.You can borrow $600 today and repay $675 in two weeks.What is the compound annual rate implied by this 12.5 percent rate charged for only two weeks?

Consider that you are 30 years old and have just changed to a new job.You have $91,000 in the retirement plan from your former employer.You can roll that money into the retirement plan of the new employer.You will also contribute $400 each month into your new employer's plan.If the rolled-over money and the new contributions both earn a 7 percent annual return,how much should you expect to have when you retire in 38 years?

If the present value of an ordinary,8-year annuity is $12,500 and interest rates are 9.1 percent,what is the present value of the same annuity due?

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

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?

In order to discount multiple cash flows to the present,one would use:

Present Value of a Perpetuity What is the present value,when interest rates are 6.5 percent,of a $100 payment made every year forever?

Your current $155,000 mortgage calls for monthly payments over 25 years at an annual rate interest rate of 6 percent.If you pay an additional $50 each month beginning with the first payment,how much interest expense do you save by pre-paying?

Present Value of an Annuity What is the present value of a $600 annuity payment over 4 years if interest rates are 6 percent?

Your current $115,000 mortgage calls for monthly payments over 30 years at an annual rate interest rate of 7 percent.If you pay an additional $50 each month beginning with the first payment,how much interest expense do you save by pre-paying?

How might credit card companies keep their cardholders in debt for a long time?

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

A small business owner visits his bank to ask for a loan.The owner states that she can repay a loan at $1,500 per month for the next 3 years and then $500 per month for three years after that.If the bank is charging customers 10 percent APR,how much would it be willing to lend the business owner?

Your firm needs to buy additional physical therapy equipment that costs $35,000.The equipment manufacturer will give you the equipment now if you will pay $8,000 per year for the next five years.Assume your firm can borrow at a 3 percent interest rate.You need to analyze if your firm should pay the manufacturer the $35,000 now or accept the five-year annuity offer of $8,000.Which of the following statements is correct?

The interest on your home mortgage is tax deductible.Why are the early years of the mortgage more helpful in reducing taxes than the later years?

Annuity Interest Rate What annual interest rate would you need to earn if you wanted a $200 per month contribution to grow to $14,700 in five years?

Compound Frequency Payday loans are very short-term loans that charge very high interest rates.You can borrow $200 today and repay $250 in two weeks.What is the compound annual rate implied by this 25 percent rate charged for only two weeks?