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Exam 4: Time Value of Money

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Question 61

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bank account pays a 6% nominal rate of interest.The interest is compounded quarterly.Which of the following statements is CORRECT?

A) The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
B) The periodic rate of interest is 6% and the effective rate of interest is greater than 6%.
C) The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
D) The periodic rate of interest is 3% and the effective rate of interest is 6%.
E) The periodic rate of interest is 6% and the effective rate of interest is also 6%.

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

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Question 62

Multiple Choice

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uncle has $375,000 and wants to retire.He expects to live for another 25 years and to earn 7.5% on his invested funds.How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?

A) $28,843.38
B) $30,361.46
C) $31,959.43
D) $33,641.50
E) $35,323.58

F) A) and C)
G) A) and E)

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Question 63

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time line is meaningful even if all cash flows do not occur annually.

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.She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account.What is the maximum number of $45,000 withdrawals that she can make and still have at least $50,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)

Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly.Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year.What's the difference in the effective annual rates charged by the two banks?

U) S.Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.The nominal interest rate is 6%, semiannual compounding.Which of the following statements is CORRECT?

Starting to invest early for retirement increases the benefits of compound interest.

borrowed $50,000 which you must repay in 10 years.You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate.You expect to earn 5% on your funds, and you expect a 3% inflation rate.To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target?

Suppose Sally Smith plans to invest $1,000.She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%.After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A.(Ignore risk, and assume that compounding occurs annually.)

What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.How much would you still owe at the end of the first year, after you have made the first payment?

Suppose a U.S.treasury bond will pay $2,500 five years from now.If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

is the present value of the following cash flow stream at a rate of 6.25%?

Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding.What effective annual rate (EFF%) does the bank pay?

a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

Which of the following statements regarding a 15-year (180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

father is about to retire, and 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?

time line is not meaningful unless all cash flows occur annually.

just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly.If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?

much would $1, growing at 3.5% per year, be worth after 75 years?