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Exam 4: Time Value of Money

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Question 21

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Your bank account pays an 8% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

A) The periodic rate of interest is 8% and the effective rate of interest is also 8%.
B) The periodic rate of interest is 2% and the effective rate of interest is 4%.
C) The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
D) The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
E) The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

F) B) and E)
G) A) and D)

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Question 22

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Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.What is the effective annual rate on the loan?

A) 8.24%
B) 8.45%
C) 8.66%
D) 8.88%
E) 9.10%

F) A) and B)
G) A) and C)

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Question 23

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Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year.If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?

Which of the following statements is CORRECT?

You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly.If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.

Suppose a State of North Carolina bond will pay $1,000 ten years from now.If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

Your investment account pays 8.0%, compounded annually.If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.Which of the following would increase the calculated value of the investment?

You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation.To repay you, DeVille will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7.You are confident the payments will be made, since DeVille is essentially riskless.You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan.What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately.The going rate on such annuities is 5.15%.How much would it cost him to buy the annuity today?

Cochrane Associate's net sales last year were $525 million.If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?

Which of the following bank accounts has the highest effective annual return?

A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today.You will deposit your savings in an account that pays 5.2% interest.How much will you have just after you make the 3rd deposit, 3 years from now?

Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year.How much would be in the account after 8 months, assuming each month has 30 days?

Your aunt has $500,000 invested at 5.5%, and she now wants to retire.She wants to withdraw $45,000 at the beginning of each year, beginning immediately.When she makes her last withdrawal (at the beginning of a year) , she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year, your withdrawal is at the end of that same year) .What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

A "growing annuity" is any cash flow stream that grows over time.

Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.