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Time value of money concept

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1. The time value of money concept rests on which of the following principles?

a. a dollar today is worth more than a dollar in the future

b. A dollar in the future is worth more than a dollar today

c. a dollar is always worth the same amount

d. time is money

e. a dollar should be spent immediately to get the most value

2. In a rare moment of generosity, you give your nephew $100 on his first birthday. Your nephew's mother, however, knows the time value of money, so she invests the money in a 20-year 7% CD. (At maturity the CD pays back the principal plus accumulated interest at 7% a year.) If your nephew cashes in the CD at maturity, how much will he receive?

a. $107

b. $358

c. $387

d. $2,140

3. In November 1998 you bought 100 shares of Microsoft stock for $35.375 a share. In November 2000, hearing about an unfavorable ruling against Microsoft by a Federal judge, you sold your stock for $92.5625 a share. What was your average annual rate of return on your Microsoft investment? (disregard dividends and commissions)

a. 262%

b. 62%

c. 585%

d. 1.6%

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Solution Preview

1. The time value of money concept rests on which of the following principles?

a. a dollar today is worth more than a dollar in the future

2. In a rare moment of generosity, you give your nephew $100 on his first birthday. Your nephews mother, however, knows the ...

Solution Summary

Time value of money concept

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Four questions using the time value of money concepts

1. Compute the time it takes to save $10,000 if you know you can save $300 per month in a bank account paying 10 percent interest.

2. Compute the amount of money you need to invest today to have a balance of $10,000 10 years from now in a bank account expected to earn 10 percent interest.

3. You are saving $300 per month in a 5% account and want to know how much you will have for retirement.

4. You take out a mortgage of $200,000 for your house at 4% for 30 years. You want to compute your monthly P&I payment (principal and interest).

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