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Exam 4: Time Value of Money

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Question 71

Multiple Choice

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Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?

A) 15.27%
B) 16.08%
C) 16.88%
D) 17.72%
E) 18.61%

F) A) and C)
G) A) and D)

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Question 72

Multiple Choice

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is the present value of the following cash flow stream at a rate of 8.0%?

A) $7,917
B) $8,333
C) $8,772
D) $9,233
E) $9,695

F) C) and E)
G) None of the above

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Question 73

Multiple Choice

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are considering two equally risky annuities, each of which pays $5,000 per year for 10 years.Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Which of the following statements is CORRECT?

What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?

Steve and Ed are cousins who were both born on the same day, and both turned 25 today.Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund.The grandfather (or his estate's trustee) Until now, the grandfather has been disappointed with Ed, hence has not given him anything.However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed.He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made.If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

Which of the following bank accounts has the highest effective annual return?

Suppose Randy Jones plans to invest $1,000.He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%.After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A.(Ignore risk, and assume that compounding occurs annually.)

Which of the following statements is CORRECT?

75-year-old grandmother expects to live for another 15 years.She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return.If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

subscription to Investing Wisely Weekly is about to expire.You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately.Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?

the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?

father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year.What is the effective annual rate on the loan?

Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal.The proportions depend on the original life of the loan and the interest rate.

a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.