Mini Quiz Ch.5

A series of cash flows may not always necessarily be an annuity. Cash flows can also be uneven and variable in amount, but the concept of the time value of money will continue to apply. Consider the following cash flows, each to be received at the end of the year listed. Annual Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 $250.0 $37.5 $480.0 $300.0 $550.0 An appropriate annual interest rate on this investment is 4%. What is the present value of this uneven cash flow stream, rounded to the nearest whole dollar (use this numerical format: $5,000.00)?

$1,410.27

An ordinary annuity selling at $8,860.53 today promises to make equal payments at the end of each year for the next six years (N). If the annuity's appropriate interest rate (I) remains at 8.00% during this time, the annual annuity payment (PMT) will be (use this numerical format: $5,000.00)?

$1,916.67

Heather deposited $1,700 at her local credit union in a savings account at the rate of 9.8% paid as simple interest. She will earn interest once a year for the next 13 years. If she were to make no additional deposits or withdrawals, how much money would the credit union owe Heather in 13 years (use dollar sign and answer to two decimal places)?

$3,865.80

Now, assume that Heather's credit union pays a compound interest rate of 9.8% compounded annually. All other things being equal, how much will Heather have in her account after 13 years (use dollar sign and answer to two decimal places)?

$5,731.65

Before deciding to deposit her money at the credit union, Heather checked the interest rates at her local bank as well. The bank was paying a nominal interest rate of 9.8% compounded quarterly. If Heather had deposited $1,700 at her local bank, how much would she have had in her account after 13 years (use dollar sign and answer to two decimal places)?

$5,985.09

You've decided to buy a house that is valued at $1 million. You have $100,000 to use as a down payment on the house, and want to take out a mortgage for the remainder of the purchase price. Your bank has approved your $900,000 mortgage, and is offering a standard 30-year mortgage at a 10% fixed nominal interest rate (called the loan's annual percentage rate or APR). Under this loan proposal, your mortgage payment will be how much (use this numerical format: $5,000.00)?

$7,897.88

If an investment of $35,000 is earning an interest rate of 8.00%, compounded annually, then how many years will it take for this investment to reach a value of $44,089.92—assuming that no additional deposits or withdrawals are made during this time? Answer to two decimal places.

3.00

If a security currently worth $12,800 will be worth $15,573.16 five years in the future, what is the implied interest rate the investor will earn on the security—assuming that no additional deposits or withdrawals are made (answer to two decimal places)?

4.00%

An investor can invest money with a particular bank and earn a stated interest rate of 4.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity? Answers should use a percent sign and be rounded to two decimal places.

4.40% 1.10% 4.47%

A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.

Discounting

A series of equal cash flows that are expected to continue forever.

Perpetuity

There are two categories of cash flows: single cash flows, referred to as "lump sums," and annuities. Based on your understanding of annuities, answer the following questions. Which of the following statements about annuities are true? Check all that apply.

annuities are defined as a series of equal payments at regular intervals either made, received, or both, for a certain number of periods an ordinary annuity of equal time earns less interest than an annuity due

The name given to a series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, annually, and so on).

annuity due

After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest.

false

A series of equal cash flows that are paid or received at the end of regular intervals, such as a day or a month.

ordinary annuity

The concept that states that the timing of the receipt or payment of a cash flow will affect its value to the holder of the cash flow.

time value of money

All other factors being equal and assuming annual compounding, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year.

true

All other variables held constant, investments paying simple interest have to pay higher interest rates to earn the same amount of interest as an account earning compound interest.

true