Time Value of Money Present Value Cash Flow and EAR

1. If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly, what
will the account balance be in seven years?
A. 18,001
B. 18,207
C. 19,112
D. 19,344

FV = ?
PV = $12,000
r =6%/4 = 1.5%
n =7 x 4= 28
FV = PV x (1+ r) n
FV =12,000 x (1+0.015)28
PV = 18,206.66 ≈ 18,207
So the correct option is B

2. A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of
deposit that pays 10% compounded only once per year.
TRUE
FALSE

Answer:
True

3. What is the monthly rate of interest that will yield an annual effective interest rate of 12 percent?
A. 1.499%
B. 0.949%
C. 0.953%
D. 1.949%

Monthly rate = 1.121/12 -1 = 0.949%

So the correct option is B

4. Cindy wants $2.5 million for her retirement at age 65. Cindy is 25 years old today and plans to
deposit equal amounts each year starting on her 26th birthday and ending on her 65th birthday. If
her investments earn 6% per year, how much must each deposit be to the nearest dollar?
Hint:BEG

$___________________

5. You wish to accumulate $10,000 by depositing $481.46 per month into a savings account that
earns 4.75% compounded monthly. How many monthly deposits must you make?
_____________
6. You borrow $25,000 to buy a car, and agree to make 48 monthly payments of $607.39 to repay the
loan. What annual rate of interest, which is being compounded monthly, are you being charged?
_________ %

7. Betty borrows $60,000 at 12 percent compounded annually. The loan is to be repaid in five
equal annual end-of-year installments. How much must each loan payment be?

$16,645

FV=PMT × [(1+r) n-1] / r

8. A bond matures in 20 years, at which time it pays the owner $1,000. It also pays $70 at the end of
each of the next 20 years. If similar bonds are currently yielding 7%, what is the market value of
the bond?
A. over $1,000
B. under $1,000
C. exactly $1,000
D. cannot be determined from the information given

9. How much would you be willing to pay (rounded to the nearest dollar) for a 20-year cash flow if
the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?
A. $84,500
B. $63,445
C. $56,734
D. $53,777

10. You are ready to retire. A glance at your 401(k) statement indicates that you have $750,000. If the
funds remain in an account earning 9.0%, how much could you withdraw at the beginning of each
year for the next 25 years?
A. $55,620
B. $70,050
C. $35,830
D. $2,500

11. Congratulations! You are the proud winner of the multi-state $40 million Sour Ball Lottery. You
can receive $2,000,000 at the end of each year for the next 20 years or choose the "cash option"
and receive a lump sum. If the discount rate is 7%, what is the value today of the 20 year payout
option?
 A. $26,945,332
B. $29,707,503
C. $32,977,401
D. $21,188,028

12. Using the above information, suppose you told the Lottery Commission said they would pay you
at the beginning of each year for the next twenty years. The lottery commission will use a
discount rate of 6%. What would be the lump sum value today of the twenty year payout?
A. $40,000,000
B. $24,316,233
C. $25,394,327
D. $23,568,789

13. A credit card company states an annual percentage rate of 15% compounded monthly. What is
the effective annual rate?
A. 15.00%
B. 16.07%
C. 16.54%
D. 16.75%

EAR = (1+ r/12)12-1

EAR = (1+ 15%/12)12 -1

EAR = 16.07%

So the correct option is B

14. Augustus McRae deposited $10,000 in a savings account that paid 9 % interest compounded
quarterly. What is the effective rate of interest?
A. 9.00%
B. 9.42%
C. 9.31%
D. 9.25%
EAR = (1+ r/4)4-1

EAR = (1+ 9%/4)4 -1

EAR = 9.31%

So the correct option is C

15. You finally graduated with your Masters. You got a great job, but now you need to pay back
some loans ☹. You have $34,000 in loans and the interest rate is 6.8%. How much do you
need to pay monthly if you want to pay off in ten years?
A. $381.21
B. $391.27
 C. $376.54
D. $388.69

16. You finally graduated with your Masters. You got a great job, but now you need to pay back
some loans ☹. You have $34,000 in loans and the interest rate is 6.8%. What would be your
balance after 3 years?
A. $26,093
B. $25,185
C. $26,795
D. $27,123

17. You finally graduated with your Masters. You got a great job, but now you need to pay back
some loans ☹. You have $34,000 in loans and the interest rate is 6.8%. What would be your
balance after 3 years? Suppose you could re-finance the balance after three years at 4.6% with
a 5 year loan. What would your payments be?
A. $457.23
B. $445.65
C. $487.64
D. $519.29

18. You finally graduated with your Masters. You got a great job, but now you need to pay back
some loans ☹. You have $34,000 in loans and the interest rate is 6.8%. How long would if take
you to pay it off if you paid $500 per month?
A. 6.25 years
B. 6.60 years
C. 6.90 years
D. 7.20 years

19. Ms. Knight has won a scholarship which pays her $5,000 per year for 3 years starting a
year from today. She is curious to know how much should would have needed to save to
equal her scholarship. She wants to know the present value of the scholarship using a
discount rate of 7%.

A. $15,000
B. $14,164
C. $13,122
D. $13,789

20. You have an uncle wants to see you be successful in life. He has no children of his own,
so he’d like to do something for you, but at the same time instill a good work ethic. He
has promised to match up to 50% of what you make by working for your first 5 years of
working. You have just graduated and found a job paying $50,000. You were wanting to
 know the present value of your uncle’s gift. You elected to measure the gift using a 9.25%
discount rate. What is the value of your uncle’s gift to the nearest dollar?

$96,614

21. As the interest rate increases, present value decreases.

Answer:

True