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

You have a credit card with a balance of $18,000.The annual interest rate on the card is 18% compounded monthly,and the minimum payment is $400 per month.If you pay only the minimum payment each month and do not make any new charges on the card,how many years will it take for you to pay off the $18,000 balance?

Delight Candy,Inc.is choosing between two bonds in which to invest their cash.One bond is being offered from Hershey's and will mature in 10 years and pays 12% per year,compounded quarterly.The other alternative is a Mars bond that will mature in 20 years and that pays 12% per year,compounded quarterly.What would be the present value of each bond if the discount rate is 10%?

The present value of an annuity increases as the discount rate increases.

What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?

The formula for calculating the present value of a perpetuity is P = A/(1 + i).

If you put $510 in a savings account at the beginning of each year for 30 years,how much money will be in the account at the end of the 30th year? Assume that the account earns 5%,and round to the nearest $100.

What is the present value of $300 received at the beginning of each year for five years? Assume that the first payment is not received until the beginning of the third year (thus the last payment is received at the beginning of the seventh year).Use a 10% discount rate,and round your answer to the nearest $100.

You have just won a magazine sweepstakes and have a choice of three alternatives.You can get $100,000 now,or $10,000 per year in perpetuity,or $50,000 now and $150,000 at the end of 10 years.If the appropriate discount rate is 12%,which option should you choose?

How much money must you pay into an account at the beginning of each of 30 years in order to have $10,000 at the end of the 30th year? Assume that the account pays 11% per annum,and round to the nearest $1.

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years.Assuming an opportunity cost of 12%,what do you estimate that you will have in this account at retirement?

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

To evaluate and compare investment proposals,we must adjust all cash flows to a common date.

Suppose you are 40 years old and plan to retire in exactly 20 years.21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments.You expect to live to the age of 85.How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?

If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years,how much will be in the account at the end of the 20th year? Assume that the account earns 10%,and round to the nearest $10.

What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The first payment will be received today,and the discount rate is 10% (round to nearest $10).

What is the present value of a $200 perpetuity when the discount rate is 10%?

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

________ annuities involve depositing money at the end of the period and allowing it to grow.

You deposited $2,000 in a bank account paying 6% on January 1,2004,and then you made $2,000 deposits on January 1 in 2005 and 2006.Which of the following expressions will calculate your bank balance just after the last payment was deposited?

A commercial bank will loan you $7,500 for two years to buy a car.The loan must be repaid in 24 equal monthly payments.The annual interest rate on the loan is 12% of the unpaid balance.What is the amount of the monthly payments?