managerial finance ch5
Ashley has a large and growing collection of animated movies. She wants to replace her old television with a new LCD model, so she has started saving for it. At the end of each year, she deposits $1,620 in her bank account, which pays her 10% interest annually. Ashley wants to keep saving for two years and then buy the newest LCD model that is available. Ashley's savings are an example of an annuity. How much money will Ashley have to buy a new LCD TV at the end of two years?
$3,402.00 come back
If a security currently worth $2,000 will be worth $2,809.86 three 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?
12.00% see how to work problem In = [(FVn/PVn)1/N]−1
If an investment of $30,000 is earning an interest rate of 8.00%, compounded annually, then it will take ____________ for this investment to reach a value of $37,791.36—assuming that no additional deposits or withdrawals are made during this time.
3 years come back FVn= PV0 x (1+i)^n
Which of the following is an example of an annuity?
A lump-sum payment made to a life insurance company that promises to make a series of equal payments later for some period of time
Which of the following statements about annuities are true? Check all that apply.
An annuity due is an annuity that makes a payment at the beginning of each period for a certain time period. An annuity due earns more interest than an ordinary annuity of equal time. An annuity is a series of equal payments made at fixed intervals for a specified number of periods
Which of the following statements is true—assuming that no additional deposits or withdrawals are made?
An investment of $50 at an annual rate of 5% will return a higher value in five years than $25 invested at an annual rate of 10% in the same time. come back
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 4.00%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
An investment that matures in five years PV4= 1000/(1+.04)^4 = 854.80 PV5= 1000/(1+.04)^5 = 821.93
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 11.00%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
An investment that matures in seven years PV6yrs= 1000/(1+.11)^6 =534.64 PV7yrs= 1000/(1+.11)^7 =481.66
Which of the following is true about finding the present value of cash flows?
Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.
Which of the following is true about present value calculations?
Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases.
Which of the following is true about present value calculations?
Other things remaining equal, the present value of a future cash flow decreases if the investment time period increases.
Which of the following investments that pay will $5,500 in 13 years will have a lower price today?
The security that earns an interest rate of 10.50%. PV10.50%= 5500/(1+.105)^13 = 1501.94 PV7%= 5500/(1+.07)^13 = 2282.30
Which of the following investments that pay will $12,500 in 7 years will have a higher price today?
The security that earns an interest rate of 5.50%. PV8.25%= 12500/(1+.0825)^7 = 7178.53 PV5.05%= 12500/(1+.0505)^7 = 8853.96
Which of the following investments that pay will $18,000 in 4 years will have a lower price today?
The security that earns an interest rate of 6.00%. PV4%= 18000/(1+.04)^4 =15386.48 PV6%= 18000/(1+.06)^4 = 14257.69
Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 11.00%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price?
an investment that matures in nine years PV9yrs= 1000/(1+.11)^9 = 390.92 PV8yrs= 1000/(1+.11)^8 = 433.93
is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
discounting
