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Exam 28: Time Value of Money

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Question 61

True/False

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Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

A) True
B) False

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Question 62

Multiple Choice

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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?

A) The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.
B) The periodic interest rate is greater than 3%.
C) The periodic rate is less than 3%.
D) The present value would be greater if the lump sum were discounted back for more periods.
E) The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

F) D) and E)
G) C) and E)

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Question 63

Multiple Choice

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Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Brockman Corporation's earnings per share were $3.50 last year,and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained,how many years would it take for Brockman's EPS to triple?

Your uncle has $300,000 invested at 7.5%,and he now wants to retire.He wants to withdraw $35,000 at the end of each year,beginning at the end of this year.He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account.What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer,round down to the nearest whole number.)

You have purchased a U.S.Treasury bond for $3,000.No payments will be made until the bond matures 10 years from now,at which time it will be redeemed for $5,000.What interest rate will you earn on this bond?

Your cousin will sell you his coffee shop for $250,000,with "seller financing," at a 6.0% nominal annual rate.The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years,and then make an additional final (balloon) payment of $50,000 at the end of the last month.What would your equal monthly payments be?

Your aunt has $500,000 invested at 5.5%,and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year,beginning immediately.When she makes her last withdrawal (at the beginning of a year) ,she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year,your withdrawal is at the end of that same year) .What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer,round down to the nearest whole number.)

If a bank compounds savings accounts quarterly,the nominal rate will exceed the effective annual rate.

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

Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today.You could earn 5.5% on your money in other investments with equal risk.What is the most you should pay for the annuity?

Billy Thornton borrowed $20,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Billy have to pay in a 30-day month?

You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business.You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12) .The first deposit will be made a year from today.In addition,your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0) .If the account earns 9% compounded annually,how much will you have when you start your business 12 years from now?

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

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Which of the following statements regarding a 15-year (180-month) $225,000,fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

Which of the following statements is CORRECT?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest,compounded annually.How much will you have when the CD matures?

On January 1,2016,your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 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 2016?