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

Harry just bought a new four-wheel-drive Jeep Cherokee for his lumber business.The price of the vehicle was $35,000,of which he made a $5,000 down payment and took out an amortized loan for the rest.His local bank made the loan at 12% interest for five years.He is to pay back the principal and interest in five equal annual installments beginning one year from now.Determine the amount of Harry's annual payment.

You are saving money to buy a house.You will need $7,473.50 to make the down payment.If you can deposit $500 per month in a savings account which pays 1% per month,how long will it take you to save the $7,473.50?

How much must you deposit at the end of each of the next 10 years in a savings account paying 5% annually in order to have $10,000 saved by the end of the 10th year?

You believe WSU stock will pay dividends of $1.00,$1.25,and $1.50 at the end of each of the next 3 years.Immediately after receiving the third dividend,you will sell the stock for $28.50.If the appropriate discount rate is 12%,you should be willing to pay $20.75 for this stock.

A bond paying interest of $120 per year forever is an example of a perpetuity.

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?

As time increases for an amortized loan,the ________ decreases.

Holding all other variables constant,payment per period for an annuity due will be higher than an ordinary annuity.

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

A compound annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.

If you have $20,000 in an account earning 8% annually,what constant amount could you withdraw each year and have nothing remaining at the end of five years?

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments.Round to the nearest whole dollar. Year Cash Flow 1 $3,000 2 $4,000 3 $5,000

To find the present value of an annuity due,one could

Assume that two investments have a three-year life and generate the cash flows shown below.Which of the two would you prefer? Year Investment A Investment B 1 $5,000 $8,000 2 $5,000 $5,000 3 $5,000 $2,000

How much money must you pay into an account at the beginning of each of five years in order to have $5,000 at the end of the fifth year? Assume that the account pays 12% per year,and round to the nearest $10.

Your parents are planning to retire in Phoenix,AZ in 20 years.Currently,the typical house that pleases your parents costs $200,000,but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years.To buy a house upon retirement,what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?

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?

The present value of a $100 perpetuity discounted at 5% is $1200.

You are considering purchasing common stock in AMZ Corporation.You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year.You also believe that you can sell the common stock two years from now for $30.00 per share.If you require a 14% rate of return on this investment,what is the maximum price that you would be willing to pay for a share of AMZ common stock?

You have borrowed $70,000 to buy a sports car.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate compounded monthly.Calculate the total amount of interest dollars you will pay the bank over the life of the loan.Round to the nearest dollar and assume end-of-month payments.