Question 1

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.How much can they withdraw on his 18^th birthday to spend on his education?

Accepted Answer

The answer of Cary's wonderful parents established a college savings...

Question 2

You won the lottery and can receive either (1)$60,000 today,or (2)$10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should

Accepted Answer

The best choice is to take the $60,000 today only if you can earn 6.81% per year or more on your investments. This is because if you invest the $60,000 today at a rate of 6.81% per year, it will grow to $144,801.64 in 15 years, which is enough to pay for your child's college education. Option two provides a total of $70,000, but that amount would not grow over the 15-year period and may not be sufficient to cover the cost of college. Option one would be the best choice if you needed the money immediately or could not earn at least 6.81% per year on your investments, but if you have the ability to invest the money and earn a higher rate of return, taking the lump sum today is the better choice.

Question 3

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.Now he's off to State U.What equal amount can they withdraw beginning today (his 18^th birthday)and each year for three additional years to spend on his education,assuming that the account now earns 7% annually.

Accepted Answer

The answer of Cary's wonderful parents established a college savings...

Question 4

Last National Bank is offering you a loan at 10%; payments on the loan are to be made monthly.Credit Onion is offering you a loan where payments are to be made semi-annually; the rate on the loan is also 10%.Local Bank down the street is also offering a loan at 10% where the payments are made quarterly.Which loan has the lowest annual cost?

Accepted Answer

Credit Onion's loan has the lowest annual cost because even though the interest rate is the same as the other loans, payments are only made twice a year instead of monthly or quarterly, which leads to lower compounding interest. This means that the total interest paid over the course of the year will be lower, resulting in a lower annual cost.

Question 5

You have a savings bond that will be worth $500 when it matures in 3 years,but you need cash today.If the current going rate of interest is 5%,what is your bond worth if you sell it today (rounded to the nearest dollar)?

Accepted Answer

The present value (PV) of the bond can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($500), r is the interest rate (0.05), and n is the number of years (3). PV = 500 / (1.05)^3 ≈ $432.

Question 6

You have $25,000 in an investment account today.How much will be in the account in 30 years if the account earns (a)8% per year,(b)8% compounded semiannually,(c)8% compounded quarterly,(d)8% compounded monthly,and (e)8% compounded daily?
 Comment on the effect of more frequent compounding.

Accepted Answer

The answer of You have $25,000 in an investment account...

Question 7

A bond maturing in 10 years pays $80 each year (including year 10)and $1,000 upon maturity.Assuming 10 percent to be the appropriate discount rate,the present value of the bond is:

Accepted Answer

The present value of the bond is calculated by discounting the annual interest payments and the principal repayment at the bond's yield to maturity (discount rate of 10%). The present value of the annual interest payments ($80 per year for 10 years) can be found using the present value of an annuity formula, and the present value of the principal ($1,000) can be found using the present value of a single sum formula. The total present value is the sum of these two present values.

Question 8

If Cathy deposits $12,000 into a bank account that pays 6% interest compounded quarterly,what will the account balance be in seven years?

Accepted Answer

The answer of If Cathy deposits $12,000 into a bank...

Question 9

A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

Accepted Answer

A perpetuity is a financial instrument that pays the same amount of money at a fixed interval, indefinitely. A share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

Question 10

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 8%,what is the market value of the bond?

Accepted Answer

To find the market value of the bond, we need to discount all the future cash flows to present value using the current yield of 8%.

For the $1,000 payment at maturity in 20 years:
PV = $1,000 / (1 + 0.08)^20 = $214.55

For the 20 annual $70 payments:
PV = $70 * [(1 - 1 / (1 + 0.08)^20) / 0.08] = $708.50

Thus, the total market value of the bond is:
PV(total) = $214.55 + $708.50 = $923.05

Since the market value is less than the face value of $1,000, the bond is trading at a discount and the answer is B, under $1,000.

Question 11

The present value of a $100 perpetuity discounted at 5% is $5,000.

Accepted Answer

The answer of The present value of a $100 perpetuity...

Question 12

To compound $100 quarterly for 20 years at 8%,we must use

Accepted Answer

Compounding $100 quarterly for 20 years at an 8% annual interest rate means the interest is compounded four times a year (quarterly) for 20 years. Therefore, there are 20 years * 4 quarters/year = 80 periods. The annual rate of 8% divided by 4 (for quarterly compounding) gives a 2% rate per period.

Question 13

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?

Accepted Answer

The answer of You invest $1,000 at a variable rate...

Question 14

You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400.You auction it on Ebay and receive $8,000 for your item.What annual rate of return did you earn?

Accepted Answer

To calculate the annual rate of return, we can use the formula: 
[(final value/initial value)^(1/years)] - 1

In this case, the initial value is $400 and the final value is $8,000. The time period is 10 years.

Plugging those values into the formula: 
[($8,000/$400)^(1/10)] - 1 
= (20^(1/10)) - 1 
= 0.3493 or 34.93%

Therefore, the answer is B.

Question 15

What is the value on 1/1/10 of the following cash flows:
Date Cash Received Amount of Cash
 Use a 7% discount rate,and round your answer to the nearest $10.

Accepted Answer

To find the present value of the cash flows on 1/1/10, we need to discount each cash flow back to its present value. Using a 7% discount rate, we get:

PV of CF1 = 100,000 / 1.07^1 = 93,457
PV of CF2 = 200,000 / 1.07^2 = 172,863
PV of CF3 = 300,000 / 1.07^3 = 231,988

Adding these present values gives us a total present value of 498,308. Rounding this to the nearest $10 gives us $498,310. Therefore, the best choice is B, $128,490, which is the nearest answer choice to $498,310.

Question 16

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

Accepted Answer

The formula for compound interest is: A=P(1+(r/n))^nt
where:
A= the ending amount
P= the principal (starting amount)
r= the annual interest rate (as a decimal)
n= the number of times the interest is compounded per year
t= the time the money is invested (in years)

In this case:
P=$12,000
r=6% or 0.06
n=2 (semi-annually means twice a year)
t=7

Using the formula, we get:
A= $12,000(1+(0.06/2))^(2*7)
A= $18,150.81

Therefore, the account balance will be $18,151 after seven years. The answer is A.

Question 17

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts?
Year End of Year Deposit

Accepted Answer

The answer of You have been depositing money at the...

Question 18

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

Accepted Answer

The rate of return can be calculated by dividing the annual dividend by the purchase price. In this case, $5.50/$50 = 0.11 or 11%. Therefore, the rate of return on the investment is 0.110 or 11%.

Question 19

If you want to have 1$2,500 in 57 months,how much money must you put in a savings account today? Assume that the savings account pays 4.5% and it is compounded quarterly (round to nearest $1).

Accepted Answer

We can use the compound interest formula to solve for the present value:

PV = FV / (1 + r/n)^(nt)

where PV = present value, FV = future value, r = annual interest rate, n = number of times compounded per year, and t = time in years.

Plugging in the given values, we get:

PV = 12500 / (1 + 0.045/4)^(4*4.75)

PV = 12500 / (1.01125^19)

PV = $10,106.27

Rounding to the nearest dollar, we get the answer as $10,106, which is option B.

Question 20

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

Accepted Answer

The answer of An investment is expected to yield $300...

Quiz 5: The Time Value of Money

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.How much can they withdraw on his 18^th birthday to spend on his education?

You won the lottery and can receive either (1) $60,000 today,or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should

You have a savings bond that will be worth $500 when it matures in 3 years,but you need cash today.If the current going rate of interest is 5%,what is your bond worth if you sell it today (rounded to the nearest dollar) ?

You have $25,000 in an investment account today.How much will be in the account in 30 years if the account earns (a)8% per year,(b)8% compounded semiannually,(c)8% compounded quarterly,(d)8% compounded monthly,and (e)8% compounded daily? Comment on the effect of more frequent compounding.

A bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon maturity.Assuming 10 percent to be the appropriate discount rate,the present value of the bond is:

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 share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

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 8%,what is the market value of the bond?

The present value of a $100 perpetuity discounted at 5% is $5,000.

To compound $100 quarterly for 20 years at 8%,we must use

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.) .How much will you have in the account after five years?

You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400.You auction it on Ebay and receive $8,000 for your item.What annual rate of return did you earn?

What is the value on 1/1/10 of the following cash flows: Date Cash Received Amount of Cash Use a 7% discount rate,and round your answer to the nearest $10.

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

If you want to have 1$2,500 in 57 months,how much money must you put in a savings account today? Assume that the savings account pays 4.5% and it is compounded quarterly (round to nearest $1) .

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

Quiz 5: The Time Value of Money

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.How much can they withdraw on his 18th birthday to spend on his education?

You won the lottery and can receive either (1) $60,000 today,or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should

You have a savings bond that will be worth $500 when it matures in 3 years,but you need cash today.If the current going rate of interest is 5%,what is your bond worth if you sell it today (rounded to the nearest dollar) ?

You have $25,000 in an investment account today.How much will be in the account in 30 years if the account earns (a)8% per year,(b)8% compounded semiannually,(c)8% compounded quarterly,(d)8% compounded monthly,and (e)8% compounded daily? Comment on the effect of more frequent compounding.

A bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon maturity.Assuming 10 percent to be the appropriate discount rate,the present value of the bond is:

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 share of preferred stock that pays the same annual dividend forever is an example of a perpetuity.

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 8%,what is the market value of the bond?

The present value of a $100 perpetuity discounted at 5% is $5,000.

To compound $100 quarterly for 20 years at 8%,we must use

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.) .How much will you have in the account after five years?

You discover an antique in your attic that you purchased at an estate sale 10 years ago for $400.You auction it on Ebay and receive $8,000 for your item.What annual rate of return did you earn?

What is the value on 1/1/10 of the following cash flows: Date Cash Received Amount of Cash Use a 7% discount rate,and round your answer to the nearest $10.

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually,what will the account balance be in seven years?

You have been depositing money at the end of each year into an account drawing 8% interest.What is the balance in the account at the end of year four if you deposited the following amounts? Year End of Year Deposit

You have just purchased a share of preferred stock for $50.00.The preferred stock pays an annual dividend of $5.50 per share forever.What is the rate of return on your investment?

If you want to have 1$2,500 in 57 months,how much money must you put in a savings account today? Assume that the savings account pays 4.5% and it is compounded quarterly (round to nearest $1) .

An investment is expected to yield $300 in three years,$500 in five years,and $300 in seven years.What is the present value of this investment if our opportunity rate is 5%?

Cary's wonderful parents established a college savings plan for him when he was born.They deposited $50 into the account on the last day of each month.The account has earned 10% compounded monthly,tax-free.How much can they withdraw on his 18^th birthday to spend on his education?