Exam 5: Time Value of Money

Future Value of Multiple Annuities Assume that you contribute $100 per month to a retirement plan for 20 years.Then you are able to increase the contribution to $200 per month for another 20 years.Given a 6 percent interest rate,what is the value of your retirement plan after 40 years?

A mortgage broker is offering a $225,000 30-year mortgage with a teaser rate.In the first two years of the mortgage,the borrower makes monthly payments on only a 2.5 percent APR interest rate.After the second year,the mortgage interest rate charged increases to 8.5 percent APR.What are the mortgage payments in the first two years? What are the mortgage payments after the second year?

Compounding monthly versus annually causes the interest rate to be effectively higher,and thus the future value:

Future Value Compute the future value in year 10 of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 4 using an 8 percent interest rate.

Jane has been saving $450 in her retirement account each month for the last 20 years and plans to continue contributing $450 each month for the next 20 years.Her account has been earning a 9 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?

Present Value of a Perpetuity What is the present value,when interest rates are 10 percent,of a $75 payment made every year forever?

You win $1,000 today,which happens to be your 20^th birthday.You decide to deposit this money in an account and plan to add $1,000 to it each year on your birthday beginning one year from today.If you earn 10 percent per year in the account,how long will it take to grow to $750,000?

Due to poor spending habits,Ricky has accumulated $10,000 in credit card debt.He has missed several payments and now the annual interest rate on the card is 18.95 percent! If he pays $175 per month on the card,in total,how much interest expense does Ricky pay to the credit card company?

Loan Balance Hank purchased a $20,000 car two years ago using an 8 percent,5-year 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 Hank would need to receive for his car?

Your client has been given a trust fund valued at $1 million.She cannot access the money until she turns 68 years old,which is in 12 years.At that time,she can withdraw $30,000 per month.If the trust fund is invested at a 7 percent interest rate,how many months will it last your client once she starts to withdraw the money?

Compound Frequency Say that you own a small business,which you plan to expand.Your expansion plans include borrowing $100,000 from the bank with a five-year,amortized loan.The bank has given you three loan choices: Annual payments at 8.85 percent APR Quarterly payments at 8.75 percent APR Monthly payments at 8.65 percent APR

You wish to buy a $30,000 car.The dealer offers you a 5-year loan with a 9 percent APR.What are the monthly payments? What is the monthly payment if you paid interest only?

A small business owner visits his bank to ask for a loan.The owner states that she can repay a loan at $1,250 per month for the next three years and then $500 per month for two years after that.If the bank is charging customers 12 percent APR,how much would it be willing to lend the business owner?

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 $3,500 payments,but Carrie can only make $1,500 payments and pay off her credit card debt,too.Miranda qualifies for a 6 percent,30-year mortgage,but because of her bad credit rating Carrie will be charged 7.5 percent on a 30-year mortgage.Both will put 20 percent down.How is Carrie's bad credit going to impact her apartment search?

What is the difference between an annuity due and an ordinary annuity?

Future Value of an Annuity What is the future value of an $800 annuity payment over 15 years if the interest rates are 6 percent?

When saving for future expenditures,we can add the ________ of contributions over time to see what the total will be worth at some point in time.

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

Due to poor spending habits,Ricky has accumulated $10,000 in credit card debt.He has missed several payments and now the annual interest rate on the card is 18.95 percent! If he pays $175 per month on the card,how long will it take Ricky to pay off the card?