Homework Chapter 5- The time Value of Money
Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment?
10.94%
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
Barb will earn more interest the second year than Andy.
Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?
Compounding
The process of determining the present value of future cash flows in order to know their worth today is referred to as?
Discounted cash flow valuation
Terry is calculating the present value of a bonus he will receive next year. What is the name of the process he is using?
Discounting
You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?
Future Value
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
In today's dollars, Luis's money is worth more than Soo Lee's.
Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as what?
Interest on Interest
Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following?
Present Value
Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.
Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
Simple Interest
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
The present value of this investment is $1000
Which one of the following variables is the exponent in the present value formula?
Time Periods
You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
$1256.43
Alex invested $10,500 in an account that pays 6 percent SIMPLE interest. How much money will he have at the end of four years?
$13,020
Imprudential, Inc. has an unfunded pension liability of $627 million that must be paid in 21 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. The relevant discount rate is 7.38 percent. What is the present value of this liability?
$140,564,661
You collect old coins. Today, you have two coins each of which is valued at $100. One coin is expected to increase in value by 5.2 percent annually while the other coin is expected to increase in value by 5 percent annually. What will be the difference in the value of the two coins 25 years from now?
$16.50
You are depositing $3,000 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?
$23.581.80
When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?
$31662.08
You will receive $25,000 in two years when you graduate. When you receive it, you will invest it for 6 more years at 7.5 percent per year. How much money will you have 8 years from now?
$38,582.54
You just received a $5,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 7.5 percent instead of just 7 percent on your savings?
$38,663.60
You just received $25,000 from an insurance settlement and have decided to invest it for your retirement. Currently, your goal is to retire 40 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 8.2 percent rather than just 8 percent?
$41718.03
Your older sister deposited $2,000 today at 6.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 6 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?
$47.62
A year ago, you deposited $30,000 into a retirement savings account at a fixed rate of 5.5 percent. Today, you could earn a fixed rate of 6.5 percent on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today?
$9,234.97 less
From the question above: At 6 percent interest, how long would it take to quadruple your money (FV=32,000;PV:8,000)?
23.79 years
You expect to receive $5,000 at graduation in 2 years. You plan on investing this money at 9 percent until you have $75,000. How many years from today will it be until this occurs?
33.42 years
Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account?
9.55%
Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money?
9.78%
Which one of the following will produce the lowest present value interest factor? A. 6 percent interest for 5 years. B. 6 percent interest for 8 years. C. 6 percent interest for 10 years. D. 8 percent interest for 5 years. E. 8 percent interest for 10 years.
E. 8 percent interest for 10 years.
You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You will earn 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.
I. Invest in a different account paying a higher rate of interest. III. Retire later.
