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Exam 4: Time Value of Money

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Question 51

Multiple Choice

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What annual rate of return is earned on a $13,000 investment made in year 2 when it grows to $17,000 by the end of year 7?

A) 10.64 percent
B) 4.28 percent
C) 8.04 percent
D) 5.51 percent

E) All of the above
F) B) and C)

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Question 52

Multiple Choice

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We call the process of earning interest on both the original deposit and on the earlier interest payments:

A) discounting.
B) multiplying.
C) compounding.
D) computing.

E) A) and B)
F) B) and C)

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Question 53

Multiple Choice

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What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually?

Rule of 72 Approximately what interest rate is needed to double an investment over four years?

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum.She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off.How much will you owe if you wait until year 3 to pay off the loan?

The process of figuring out how much an amount that you expect to receive in the future is worth today is called:

Explain how discounting is the reverse of compounding.

Assume you borrow $100 from a payday lender.The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112.What implied interest rate are you paying?

A stock investor deposited $3,450 six years ago.Today the account is valued at $2,180.What annual rate of return has this investor earned?

General TVM Ten years ago,Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now) .James can made a 20-year investment today and lock in a 6 percent interest rate.How much money should he invest now in order to have the same amount of money in 20 years as Jane?

Why is a dollar worth more today than a dollar received one year from now?

Future Value At age 20 you invest $1,000 that earns 7 percent each year.At age 30 you invest $1,000 that earns 10 percent per year.In which case would you have more money at age 60?

How does compounding help build wealth (or increase debt)over time?

Solving for Rates What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?

Compounding with Different Interest Rates A deposit of $300 earns interest rates of 7 percent in the first year and 10 percent in the second year.What would be the second year future value?

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today.You are charged 8 percent interest per year.What amount will you pay back and how much interest will you pay?

Solving for Rates You invested $1,000 in the stock market one year ago.Today,the investment is valued at $1,250.What return did you earn? What return would you suffer next year for your investment to be valued at the original $1,000?

What is the present value of a $7,000 payment made in six years when the discount rate is 4 percent?

Compounding with Different Interest Rates A deposit of $500 earns the following interest rates: 5 percent in the first year 6 percent in the second year,and 8 percent in the third year. What would be the third year future value?

With regard to money deposited in a bank,future values are: