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

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Question 1

Multiple Choice

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Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?

A) 2.29 years
B) 2.48 years
C) 2.51 years
D) 2.77 years
E) 2.81 years

F) All of the above
G) D) and E)

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E

Question 2

Multiple Choice

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Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

A) true value.
B) future value.
C) present value.
D) discounted value.
E) complex value.

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

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Question 3

Multiple Choice

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You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

Explain the Rule of 72.

Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

You just won $25,000 and deposited your winnings into an account that pays 6.2 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000?

You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years?

Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually.

Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

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?

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?

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 _________

Explain the time value of money principle and also identify the underlying assumption of that principle.

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value. I. Increase in the interest rate II) Decrease in the lump sum amount III) Increase in the investment time period IV) Decrease in the investment time period

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

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

You expect to receive $12,000 at graduation one year from now. You plan on investing it at 8 percent until you have $100,000. How long will you wait from now?

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:

Which one of the following is a correct statement, all else held constant?