FNAN 300 Exam 2

Interest rate -

"exchange rate" between earlier money and later money (a.k.a. *Discount rate* *Cost of capital* *Opportunity cost of capital* *Required return*)

Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? Suppose you leave the money in for another year. How much will you have two years from now?

$1,050 $1,102.50

Suppose you invest the $1,000, at an interest rate of 5% for 5 years. How much would you have?

$1,276.28

Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years. How much would you have at the end of 15 years using compound interest?

$1,586.08

Your parents set up a trust fund for you 10 years ago that is now worth $19,671.51. If the fund earned 7% per year, how much did your parents invest?

$10,000

How much could you withdraw each year if you have $2,500,000, earn 8% and make annual withdrawals for 35 years? (Beg)

$198,618.67

You decide to deposit $2,000 each year into an account for 8 years. It earns 12% interest. What would it be worth at the end of that time?

$24,599.39

You want to receive $5,000 per month for the next 5 years. How much would you need to deposit today if you can earn .75% per month?

$240,866.87

You need $50,000 in 10 years. If you can earn 6% interest, how much do you need to invest today?

$27,919.74

You want to begin saving for your daughter's college education and you estimate that she will need $150,000 in 17 years. If you feel confident that you can earn 8% per year, how much do you need to invest today?

$40,540.34

Suppose you have $200,000 to deposit and can earn .75% per month. How much could you receive every month for 5 years?

$4151.67

Suppose you had a relative deposit $10 at 5.5% interest 200 years ago. How much would the investment be worth today?

$447,189.84

You want to receive $5,000 per month in retirement. If you can earn .75% per month and you expect to need the income for 25 years, how much do you need to have in your account at retirement?

$595,808.11

What is the future value of $5,000 if it earned 8% interest for 6 years?

$7,934.37

What is the future value of an annuity due that started with $18,000, earned 10% and was left on deposit for 15 years?

$75,190.47

Suppose you need $10,000 in one year for the down payment on a new car. If you can earn 7% annually, how much do you need to invest today?

$9,345.79

What s the future value of $8,000 if it earned 4.5% interest for 5 years?

$9,969.45

Suppose you borrow $2,000 at 5% and you are going to make annual payments of $734.42. How long before you pay off the loan?

3 years

You want to purchase a new car, and you are willing to pay $20,000. If you can invest at 10% per year and you currently have $15,000, how long will it be before you have enough money to pay cash for the car?

3.02 years

Suppose you want to buy some new furniture for your family room. You currently have $500, and the furniture you want costs $600. If you can earn 6%, how long will you have to wait if you don't add any additional money?

3.13 years

You are looking at an investment that will pay $1,200 in 5 years if you invest $1,000 today. What is the implied rate of interest?

3.71%

Suppose you have $200,000 to deposit and can earn .75% per month. How many months could you receive the $5,000 payment?

47.73 months

What is the present value of $500 to be received in 5 years? 10 years? The discount rate is 10%

5 years: $310.46 10 years: $192.77

Suppose you want to buy a new house. You currently have $15,000, and you figure you need to have a 10% down payment plus an additional 5% of the loan amount for closing costs. Assume the type of house you want will cost about $150,000 and you can earn 7.5% per year. How long will it be before you have enough money for the down payment and closing costs?

5.14 years

Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you sell 3 million widgets in the current year, how many widgets do you expect to sell in the fifth year?

6,034,072 units

What annual rate has been earned if $1,000 grows into $4,000 in 20 years?

7.18%

$1,000 due on credit card Payment = $20 month minimum Rate = 1.5% per month

93.111 Months 7.75 years

Suppose you borrow $10,000 from your parents to buy a car. You agree to pay $207.58 per month for 60 months. What is the monthly interest rate?

0.75% per month

You want to receive $5,000 per month for the next 5 years. What monthly rate would you need to earn if you only have $200,000 to deposit?

1.4395% per month

What is the present value of $500 received in 5 years if the interest rate is 10%? 15%?

10% rate: $310.46 15% rate: $248.59

Suppose you are offered an investment that will allow you to double your money in 6 years. You have $10,000 to invest. What is the implied rate of interest?

12.25%

How long will it take your $10,000 to double in value if it earns 5% annually?

14.2 years

Semi-Annual, Quarterly, Monthly, Daily

If the interest is compounded more frequently than annually, divide interest by the frequency and multiply years by the frequency

Perpetuity formula:

PV = PMT / r

Clue words for Pmt

each year every year per year annually income payments or deposits or any phrase that indicates that dollars will be regularly deposited

Present Value -

earlier money on a time line

Present Value is always

negative

N =

number of years that the dollars have been left on deposit

Future Value is always

positive

PV =

the beginning dollar amount. A lump sum placed on deposit which will earn interest. IT IS ALWAYS NEGATIVE.

Pmt (Payment)

used for payments. This is a series of dollars received or spent consecutively. Payments would take the opposite sign of either FV or PV depending on whether you are using FV or PV

What would an immediate annuity be worth if you deposit $350 per year into the account, it earns 6.5% interest and you don't withdraw the money for 18 years?

$12,080.85

Suppose you need $15,000 in 3 years. If you can earn 6% annually, how much do you need to invest today?

$12,594.29

What is the present value of $15,000 if it earned 6% interest for 3 years?

$12,594.29

You are saving for a new house and you put $10,000 per year in an account paying 8%. The first payment is made today. How much will you have at the end of 3 years?

$35,061.12

Suppose you want to borrow $20,000 for a new car. You can borrow at 8% per year, compounded monthly. If you take a 4 year loan, what is your monthly payment?

$488.26

What is the present value of an account that is worth $250,000 after 30 years and it earned 5.5% interest?

$50,161.00

Clue words for Begin mode

*Annuity Due* or *Immediate Annuity* or the problem wil say that interest is earned at the *beginning of the year*

I/Y =

Interest rate earned on the account. It is entered as a whole number. It is never converted to a decimal and the percent sign is never used.

Future Value -

later money on a time line

End mode

is the default mode. All problems are end mode problems unless specifically stated otherwise. All accounts earn interest at the END of the year.

Begin mode

is used when an account earns interest from day one, from the beginning of the year.

FV =

the ending dollar amount. The amount you would have upon withdrawal of funds from the account. IT IS ALWAYS POSITIVE.

For a given time period -

the higher the interest rate, the smaller the present value

For a given interest rate -

the longer the time period, the lower the present value