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Exam 13: Time Value of Money

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Question 21

True/False

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Compound interest is interest you earn on the initial investment and on previous interest.

A) True
B) False

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Question 22

Multiple Choice

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The value that a series of payments will grow to in the future is referred to as the:

A) Future value of a single amount.
B) Present value of a single amount.
C) Future value of an annuity.
D) Present value of an annuity.

E) None of the above
F) A) and B)

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Question 23

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LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the:

The time value of money is a concept which means that the value of $1 increases over time.

Bill wants to give Maria a $500,000 gift in seven years. If money is worth 6% compounded semiannually, what is Maria's gift worth today?

Hillsdale is considering two options for comparable computer software. Option A will cost $25,000 plus annual license renewals of $1,000 for three years, which includes technical support. Option B will cost $20,000 with technical support being an add-on charge. The estimated cost of technical support is $4,000 the first year, $3,000 the second year, and $2,000 the third year. Assume the software is purchased and paid for at the beginning of year one, but that technical support is paid for at the end of each year. The discount rate is 8%. Ignore income taxes. Determine which option should be chosen based on present value considerations.

If you put $200 into a savings account that pays annual compound interest of 8% per year and then withdraw the money two years later, you will earn interest of $32.

Anthony would like to have $18,000 to buy a new car in three years. Currently, he has saved $15,000. If he puts $15,000 in an account that earns 6% interest, compounded annually, will he be able to buy the car in three years?

If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a 10% annual return investing your money elsewhere, what is the most you should be willing to invest today in this opportunity?

Simple interest is interest earned on the initial investment only.

Monica wants to sell her share of an investment to Barney for $50,000 in three years. If money is worth 6% compounded semiannually, what would Monica accept today?

How much will $1,000 invested at the end of each year grow to in 20 years, assuming an interest rate of 10% compounded annually?

Today, Thomas deposited $100,000 in a three-year, 12% CD that compounds quarterly. What is the maturity value of the CD?

An annuity is a series of equal cash payments over equal time intervals.

At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

Two banks each have stated CD rates of 12%. Bank A compounds quarterly and Bank B compounds semiannually. Explain which bank offers the better CD.

The value today of receiving a series of payments in the future is referred to as the:

Miller borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

Below are excerpts from interest tables for 8% interest. $\begin{array}{ccccc} & \underline{1} & \underline{2} & \underline{3} & \underline{4} \\1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \\2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \\3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \\4 & 4.5061 & 0.73503 & 1.36049 & 3.31213\end{array}$ Column 1 is an interest table for the:

The more frequent the rate of compounding, the more interest that is earned on previous interest, resulting in a higher future value.