Finance ch.5

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

Present Value

In 1904, the first Putting Green Championship was held. The winner's prize money was $170. In 2016, the winner's check was $1,180,000. a.What was the percentage increase per year in the winner's check over this period? b.If the winner's prize increases at the same rate, what will it be in 2049?

A = P[ 1 + (r /100)]^n A= 1,180,000 P= 170 r= x n= (2016-1904) = 112 1,180,000 = 170 [ 1 + r/100] ^ 112 r= 8.22% b) 2049-2016 = 33 1,180,000( 1 + 0.0822)^33 = $15,985,743.02

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 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 in Year 2 than Andy.

Which one of these will increase the present value of a set amount to be received sometime in the future?

Decrease in the interest rate

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

Discount Rate

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

Discounting

You expect to receive $2,800 upon your graduation and will invest your windfall at an interest rate of 0.37 percent per quarter until the account is worth $4,525. How many years do you have to wait until you reach your target account value?

Excel Function: =NPER(rate,pmt,pv,fv) =NPER(0.37%,,-2800,4525)/4 =32.49 years

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future value

Chang Lee 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 individuals apply a discount rate of 7 percent?

In today's dollars, Chang Lee's money is worth more than Soo Lee's.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City Bank account at the end of eight years?

Simple interest=Principal*Interest Rate*time period First City Bank= 7500 * 0.09 * 8 = 5400 Compound Interest = P(1 + r )^n Second City Bank: 7500(1 + 0.09)^8 = 14944.22 14944.22 - 7500 = 7444.22 Second City Bank - First City Bank = Difference 7444.22 - 5400 = 2044.22

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 equal to $1,000.

The "Brasher doubloon," which was featured in the plot of the Raymond Chandler novel, The High Window, was sold at auction in 2014 for $4,582,500. The coin had a face value of $15 when it was first issued in 1787 and had been previously sold for $430,000 in 1979. a.At what annual rate of return did the coin appreciate from its minting to the 1979 sale? b.What annual rate of return did the 1979 buyer earn on his purchase? c.At what annual rate of return did the coin appreciate from its minting to the 2014 sale?

a) 1979 - 1787 = 192 n = 192 pv = - 15 fv = 430,000 Rate of return: 5.49% b) 2014 - 1979 = 35 n = 35 pv = -430,000 fv = 4,582,500 Rate of return: 6.99% c) 2014 - 1787 = 227 n = 227 pv = -15 fv = 4,582,500 Rate of return: 5.72%

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

Christina invested $3,000 five years ago and earns 2 percent annual interest. 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:

compounding.

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

The process of determining the present value of future cash flows in order to know their value today is referred to as:

discounted cash flow valuation.

Suppose you are committed to owning a $245,000 Ferrari. If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9 years (on the day you turn 30), how much must you invest today?

fv = 245,000 I/Y = 11.2 n = 9 pv = ? Must invest 94,237.34 today

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase. (bc inflation)

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:

interest on interest.