Exam 6: The Time Value of Money-Annuities and Other Topics

What is the present value of an annuity of $12 received at the end of each year for seven years? Assume a discount rate of 11%.The first payment will be received one year from today (round to the nearest $1).

You are going to pay $800 into an account at the beginning of each of 20 years.The account will then be left to compound for an additional 20 years.At the end of the 41st year you will begin receiving a perpetuity from the account.If the account pays 14%,how much will you receive each year from the perpetuity (round to nearest $1,000)?

All else constant,an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.

A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments.What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?

You have been accepted to study gourmet cooking at Le Cordon Bleu Culinary Institute in Paris,France.You will need $15,000 every six months (beginning six months from now)for the next three years to cover tuition and living expenses.Mom and Dad have agreed to pay for your education.They want to make one deposit now in a bank account earning 6% interest,compounded semiannually,so that you can withdraw $15,000 every six months for the next three years.How much must they deposit now?

Assume that two investments have a three-year life and generate the cash flows shown below.Which of the two would you prefer?

You have borrowed $70,000 to buy a speed boat.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate,compounded monthly.Create an amortization schedule for the first two months of the loan.

What is the present value of $150 received at the beginning of each year for 16 years? The first payment is received today.Use a discount rate of 9%,and round your answer to the nearest $10.

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.

What is a series of equal payments for an infinite period of time called?

What is a series of equal payments to be received at the beginning of each period,for a finite period of time,called?

We can use the present value of an annuity formula to calculate constant annual loan payments.

A friend of yours borrows $19,500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year installments.The interest paid on this loan in year three is:

You have been offered the opportunity to invest in a project which will pay $1,000 per year at the end of years one through 10 and $2,000 per year at the end of years 21 through 30.If the appropriate discount rate is 8%,what is the present value of this cash flow pattern?

Gina Dare,who wants to be a millionaire,plans to retire at the end of 40 years.Gina's plan is to invest her money by depositing into an IRA at the end of every year.What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%.Round off to the nearest $1.

If your opportunity cost is 10%,how much are you willing to pay for an investment promising $750 per year for the first four years and $450 for the next six years?

Your company has received a $50,000 loan from an industrial finance company.The annual payments are $6,202.70.If the company is paying 9% interest per year,how many loan payments must the company make?

You are considering a home loan with monthly payments at an annual percentage yield of 5.116%.What is the quoted rate of interest on the loan?

Edward Johnson decided to open up a Roth IRA.He will invest $1,800 per year for the next 35 years.Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month.Assume that Edward will earn 8.75% annual interest compounded monthly over the life of the IRA.How much will he have at the end of 35 years?

What is the present value of $27 received at the end of each year for five years? Assume a discount rate of 9%.The first payment will be received one year from today (round to the nearest $1).