Purchase Solution

# time value

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1. A bank is paying 7.5% APR on a CD. (Note: The convention when there are no periodic payments is to assume annual compounding, unless stated otherwise. Thus this is annual compounding.) If you put \$2500 into an account, how much will the account be worth in 3 years?
a. 3062.5
b. 3105.74
c. 2505.63
d. 4375
e. insufficient information to compute

2. Your firm is concerned about a financial obligation of \$5 million coming due in 6 years. If your firm could earn 6.5% APR on an investment, how much would your firm have to invest today to fund (finance) the future \$5 million obligation? [In other words, what is the PV of \$5 M due 6 years from now if the interest rate is 6.5%?]
a. 7.296 M
b. 0.833 M
c. 1.950 M
d. 3.427 M
e. insufficient information to compute

3. What is the PV of \$500 per year for 8 years if the required return is 8.5% (assume the \$500 payments come at the end of each of the next 8 years)?
a. 3079.93
b. 260.33
c. 2819.59
d. 3000.79
e. 62.5

4. What is the FV at the end of year 6 of \$1500 put in an account today if the return is 7% per year?
a. 2251.10
b. 2130.00
c. 999.51
d. 8149.32
e. 10,729.94

5. Bank A charges 14% APR on auto loans with monthly compounding. What is the Effective Annual Rate (EAR) ? (In other words, what is the EAR for a 14% APR with monthly compounding?)
a. 14.93%
b. 1.66%
c. 16.36%
d. 10.12%
e. insufficient information to answer this question.

6. Next year you will begin receiving \$155 dollars per year in perpetuity from your grandparent's family trust fund (first payment is exactly 1 year from today). You consider these payments essentially risk free and have decided to discount them at a constant risk free rate of 6.5%. What is the present value today of these future cash flows? (Hint: draw a time line to illustrate exactly the cash flows for this problem.)
a. 1353
b. 2385
c. 1270
d. 146

7. What is the present value of a \$1000 future amount received in 10 years if the appropriate discount rate is 8.5% APR? (FYI: This problem computes the value of a 10 year, \$1000 zero coupon bond, although it is phrased in time value of money language, rather than bond language.)
a. 442
b. 1000
c. 10,000
d. 100
e. 118

8. You have just taken out a 30 year mortgage on your new home for \$120,000. This mortgage is to be repaid in 360 equal monthly installments. If the stated (nominal) annual interest rate is 14.75 percent, what is the amount of each of the monthly installments? (Note: The convention when periodic payments are involved is to assume that the compounding frequency is the same as the payment frequency, unless stated otherwise. Thus this implies 14.75% APR, compounded monthly for this problem.)
a. \$1,515.00
b. \$1,472.38
c. \$1,493.37
d. \$1,522.85
e. \$1,440.92

9. In finance time value of money problems, a finite series of equal payments over equal periods is referred to as
a. an equilibrium cash flow problem
b. an equal-equal cash flow problem
c. a perpetuity cash flow problem
d. an annuity cash flow problem
e. a growing annuity cash flow problem
f. none of the above are accurate

10. As interest rates increase, the PV of an expected future cash flow?
a. Decreases
b. Increases
c. Does not change

##### Solution Summary

This solution is comprised of a detailed explanation to answer how much will the account be worth in 3 years.

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