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Exam 4: Introduction to Valuation: The Time Value of Money

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Question 21

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Jim just deposited $13,000 into his account at Traditions Bank.The bank will pay 1.3 percent interest,compounded annually,on this account.How much interest on interest will he earn over the next 15 years?

A) $238.16
B) $244.20
C) $360.70
D) $606.15
E) $623.70

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Question 22

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Draw a graph that illustrates the relationship between interest rates and the present value of $1,000 to be received in one year.

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Question 23

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Explain the Rule of 72.

Today,you deposit $2,400 in a bank account that pays 4 percent simple interest.How much interest will you earn over the next 5 years?

Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

The interest rate used to compute the present value of a future cash flow is called the:

Precision Engineering invested $110,000 at 6.5 percent interest,compounded annually for 4 years.How much interest on interest did the company earn over this period of time?

Identify the relationship (direct or inverse)between each of the following pairs of variables as they relate to the time value of money: (Assume all else constant) Present value and future value _________ Present value and interest rate _________ Present value and time _________ Time and interest rate _________ Time and future value _________ Interest rate and future value _________

The present value of a lump sum future amount:

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

You have been told that you need $25,600 today in order to have $100,000 when you retire 35 years from now.What rate of interest was used in the present value computation? Assume interest is compounded annually.

By definition,a bank that pays simple interest on a savings account will pay interest:

Centre Bank pays 2.5 percent interest,compounded annually,on its savings accounts.Country Bank pays 2.5 percent simple interest on its savings accounts.You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today.The amount you must deposit today:

Jamie earned $180 in interest on her savings account last year.She has decided to leave the $180 in her account so that she can earn interest on the $180 this year.The interest Jamie earns this year on this $180 is referred to as:

You want to have $25,000 for a down payment on a house 6 years from now.If you can earn 6.5 percent,compounded annually,on your savings,how much do you need to deposit today to reach your goal?

Angela has just received an insurance settlement of $35,000.She wants to save this money until her daughter goes to college.If she can earn an average of 5.5 percent,compounded annually,how much will she have saved when her daughter enters college 10 years from now?

You are scheduled to receive $7,500 in three years.When you receive it,you will invest it for eight more years at 7.5 percent per year.How much will you have in eleven years?

You have $1,500 today in your savings account.How long must you wait for your savings to be worth $4,000 if you are earning 1.1 percent interest,compounded annually?

You want to have $45,000 in cash to buy a car 4 years from today.You expect to earn 4.5 percent,compounded annually,on your savings.How much do you need to deposit today if this is the only money you save for this purpose?

You want to have $2.5 million saved on the day you retire.Explain how you can minimize the amount of cash you must invest in order to achieve this goal.