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Exam 5: Time Value of Money

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Question 1

Multiple Choice

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Your bank offers to lend you $113,200 at an 8.5% annual interest rate to start your new business.The terms require you to amortize the loan with 10 equal end-of-year payments.How much interest would you be paying in Year 2?

A) $7,178.72
B) $8,076.06
C) $8,524.73
D) $8,973.40
E) $10,319.41

F) All of the above
G) B) and C)

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Question 2

Multiple Choice

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Suppose you deposited $27,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months,assuming each month has 30 days?

A) $34,952.08
B) $30,478.21
C) $27,961.66
D) $30,198.59
E) $29,918.98

F) D) and E)
G) B) and D)

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Question 3

Multiple Choice

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You just deposited $6,500 in a bank account that pays a 4.0% nominal interest rate,compounded quarterly.If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now,how much will be in the account three years (12 quarters) from now?

Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $280,000? Round fractional months up.

Janice has $5,000 invested in a bank that pays 8.4% annually.How long will it take for her funds to triple?

Suppose Sally Smith plans to invest $1,000.She 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 more than twice the compounded value of Security A.(Ignore risk,and assume that compounding occurs annually. )

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the smaller the present value of a given lump sum to be received at some future date.

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 $170.00 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?

You are offered a chance to buy an asset for $4,500 that is expected to produce cash flows of $750 at the end of Year 1,$1,000 at the end of Year 2,$850 at the end of Year 3,and $6,250 at the end of Year 4.What rate of return would you earn if you bought this asset?

Your brother's business obtained a 30-year amortized mortgage loan for $125,000 at a nominal annual rate of 7.0%,with 360 end-of-month payments.The firm can deduct the interest paid for tax purposes.What will the interest tax deduction be for Year 1?

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or less than the nominal rate on the deposit (or loan).

What is the PV of an annuity due with 5 payments of $2,900 at an interest rate of 5.5%?

The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.

Sam was injured in an accident,and the insurance company has offered him the choice of $46,000 per year for 15 years,with the first payment being made today,or a lump sum.If a fair return is 7.5%,how large must the lump sum be to leave him as well off financially as with the annuity?

A U.S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%,semiannual compounding.Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT,assuming positive interest rates and holding other things constant?

Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

As a result of compounding,the effective annual rate on a bank deposit (or a loan)is always equal to or greater than the nominal rate on the deposit (or loan).