Deck 13: Appendix : Compound Interest and the Time-Value of Money

Question 1

The interest rate on a financial calculator to be inputted using the I/Yr key means to enter the rate per period.

Answer 1

True

Question 2

If an investment is made that pays 6% annual interest for a 4-year period with quarterly compounding, the number of periods is 36.

Answer 2

False

Question 3

Installment loans require a series of equal payments that often vary in the time period between each payment.

Answer 3

False

Question 4

There are two cash flows associated with bonds-a balloon payment and periodic interest payments.

Question 5

R&L Repair Services issued bonds with a face value of $10,000,000 and a coupon rate of 6% paid semiannually for 6 years. The market rate of interest is 5%.
How much is the market value of the bond?

A) $ 2,128,180
B) $ 8,410,310
C) $10,512,888
D) $ 6,581,880

Question 6

If Wise Saver invests $1,800,000 today at 6% interest and the money is compounded semiannually, how much will be in the bank account one year from the date invested? (Select the closest amount)

A) $1,648,000
B) $1,909,620
C) $1,908,000
D) $1,697,440

Question 7

Nickolas Industries issued bonds with a face value of $12,000,000 and a coupon rate of 5% paid semiannually for 4 years. The market rate of interest is 6%.
How much is the market value of the bond using a financial calculator?

A) $11,578,818
B) $ 9,894,092
C) $11,649,016
D) $13,826,572

Question 8

Nickolas Industries issued bonds with a face value of $12,000,000 and a coupon rate of 5% paid semiannually for 6 years. The market rate of interest is 6%.
How much is the market value of the bond?

A) $12,500,000
B) $11,649,022
C) $11,653,456
D) $11,402,760

Question 9

Which of the following determines the present value of a single cash payment?

A) Future value × (1 + discount rate)
B) Future value ÷ (1 + discount rate)
C) Future value × (1 ? discount rate)
D) Future value ÷ (1 ? discount rate)

Question 10

Cari, Inc. wishes to accumulate 1,000,000 to be used to pay off a balloon note at the end of 4 years. How much will Cari, Inc. invest today to accumulate the desired amount if the investment earns an annual rate of 12% compounded quarterly? (Select the closest amount)

A) $623,167
B) $530,496
C) $708,416
D) $698,536

Question 11

Cari, Inc. wishes to accumulate $1,000,000 to be used to pay off a loan at the end of 2 years. How much will Cari, Inc. deposit each month for two years, beginning at the end of the first month, to accumulate the desired amount if the investment earns an annual rate of 12%? (Select the closest amount)

A) $ 37,658
B) $ 47,358
C) $ 37,073
D) $ 26,432

Question 12

Bob Sarto Motor Company wants to accumulate $1,800,000 to pay off an equipment loan due in 5 years.
How much should Bob Sarto Motor Company deposit today if the bank pays 6% interest compounded annually?

Question 13

Bob Sarto Motor Company wants to accumulate $1,800,000 to pay off an equipment loan due in 5 years.
How much should Bob Sarto Motor Company deposit today if the bank pays 6% interest compounded semi-annually?

Question 14

Bob Sarto Motor Company wants to accumulate $1,400,000 to pay off an equipment balloon note due in 3 years.
How much should Bob Sarto Motor Company deposit each quarter beginning one quarter from today to accumulate the amount required if the bank pays 4% annual interest compounded quarterly?

Question 15

Bob Sarto Motor Company wants to accumulate $1,400,000 to pay off an equipment loan due in 2 years.
How much should Bob Sarto Motor Company deposit each month beginning one month from today in order to accumulate $1,400,000 if the bank pays 12% annual interest with monthly compounding?

Question 16

Mega Force Co. needs to have $200 million accumulated to fund health insurance payments for its retirees.
Will Mega Force Co. have enough accumulated at the end of 3 years if it deposits $164 million today if compounding occurs semi-annually with an annual rate of 8%?

Question 17

Mega Force Co. borrowed $1,000,000 to buy equipment to be repaid as a installment note monthly over 2.5 years.
How much will Mega Force Co. pay each month if payments begin one month from now and the annual loan rate is 12% compounded monthly?

Question 18

Mega Force Co. borrowed $600,000,000 to buy equipment with the principal to be repaid as a balloon note at the end of 5 years.
How much will Mega Force Co. pay to liquidate the principal of the note at the maturity date if interest is 8% compounded quarterly?

Question 19

Stuttgart Investments recently issued bonds with a face value of $3,000,000 and a coupon rate of 5% for 6 years. The market rate of interest is 4% and the bonds pay interest semi-annually.
Compute the market value of the bond on the issue date.

Question 20

Pharmaceutical Miracles is a new drug company entering the market. It plans to issue notes with a face value of $8,000,000 and a coupon rate of 7% for 8 years. The market rate of interest is 6%.
Compute the market value of the notes on the issue date if interest is paid semi-annually.

Question 21

Chinchilla Climbers recently issued bonds with a face value of $12,000,000 and a coupon rate of 6% for 15 years. The market rate of interest is 4%.
A. Compute the market value of the bonds if interest is paid annually.
B. Computer the market value of the bonds if interest is paid semi-annually.
C. Explain the difference in the market value determined in parts A and B.

Question 22

An investment of $1,400,000 will return $340,000 per year for 5 years. Should the investment be undertaken if the discount rate is 5% and interest is compounded once per year?

Question 23

Eggs and More Restaurants, Inc. plans to issue 20-year notes with a face value of $15,000,000 and a coupon rate of 5.5%. The market rate of interest is 4%. Interest payments will be made semi-annually.
A. Computer the market value of the bonds.
B. Assume the market rate remains at 4% after 5 years. How much cash will Eggs and More Restaurants, Inc. need to pay off the notes at this time?

Question 24

Compute the present value for each of the following amounts.
A. $60,000 received in 8 years if annual interest rate is: (1) 10% compounded annually or (2) 10% compounded semiannually
B. $12,000 received at the end of each year for the next 4 years if the money is worth 8% per year compounded annually