An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%, what is the present value of this investment?

Answer: 

PV = $500(1/(1.06)3) + $700(1/1.06)5) + $1000(1/(1.06)9)

PV = $500(.840) + $700(.747) + $1000(.592)

       = $420.00 + $522.90 + $592.00

       = $1,534.90

What is the value (price) of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.

Answer:  Using a financial calculator N=20, i=5, PMT=400, FV=10000, solve for PV=-5361.77 or $5,361.77

The expected after-tax cash flow from an investment property that you are considering is

Year 1   $25,000

Year 2   $27,500

Year 3   $30,250

At the end of year 3 you expect to sell the property for $400,000.  If the appropriate discount rate is 12%, what is the most you should pay for this property?

Answer:  [25000/(1.12)1 + 27500/(1.12)2 + 302500/(1.12)3 + 400000/(1.12)3] = $350,487.71

In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:

a. you want to deposit an amount annually at the end of each year?

b. you want to deposit one large lump sum today?

Answer: 

a. PMT = $1,294.26

b. PMT = $14,013.75

You have borrowed $70,000 to buy rental property. You plan to make monthly payments over a 15-year period

You have borrowed $70,000 to buy rental property. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate compounded monthly. Calculate the principal paid to the bank in month two of the loan. Assume end-of-period payments.

A) $184.01

B) $186.38

C) $188.46

D) $190.64

E) $192.73

A friend of yours plans to begin saving for retirement by depositing $2,000 at the end of each year for the next 25 years. If she can earn 10% annually on her investment, how much will she have accumulated at the end of 25 years?

A) $50,000

B) $196,692

C) $100,000

D) $216,361

How much must you deposit at the end of each of the next 10 years in a savings account paying 5% annually in order to have $10,000 saved by the end of the 10th year?

A) $1,000

B) $1,638

C) $1,500

D) $795

What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?

A) $4,030.50

B) $7,500.00

C) $3,500.00

D) $7,000.00

How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment?

A) $1,000

B) $3,791

C) $5,000

D) $7,700

A friend of yours would like you to lend him $5,000 today to be paid back in 5 annual payments. What would be the equal annual end-of-year payment on this loan if you charge your friend 7% interest?

A) $869.45

B) $1,000.00

C) $1,219.51

D) $1,350.00

Recently you borrowed money for a new car. The loan amount is $15,000 to be paid back in equal annual payments which begin today, and will continue to be payable at the beginning of each year for a total of five years. Interest on the loan is 8%. What is the amount of the loan payment?

A) $3,756.85

B) $4,200.00

C) $3,478.31

D) $3,000.00

If you put $510 in a savings account at the beginning of each year for 30 years, how much money will be in the account

If you put $510 in a savings account at the beginning of each year for 30 years, how much money will be in the account at the end of the 30th year? Assume that the account earns 5%, and round to the nearest $100.

A) $33,300

B) $32,300

C) $33,900

D) None of the above

If you put $10 in a savings account at the beginning of each year for 11 years, how much money will be in the account at the end of the 11th year? Assume that the account earns 11%, and round to the nearest $100.

A) $220

B) $200

C) $190

D) $180

To find the present value of an annuity due, one could

A) find the present value of an ordinary annuity and add one extra payment.

B) find the present value of an ordinary annuity but N = 1 for the number of periods.

C) find the present value of an ordinary annuity and divide by 1 + i.

D) find the present value of an ordinary annuity and multiply by 1 + i.

How much money must you pay into an account at the beginning of each of 30 years in order to have $10,000 at the end of the 30th year? Assume that the account pays 11% per annum, and round to the nearest $1.

A) $39

B) $46

C) $50

D) None of the above

How much money must you pay into an account at the beginning of each of 20 years in order to have $10,000 at the end of the 20th year? Assume that the account pays 12% per annum, and round to the nearest $1.

A) $1,195

B) $111

C) $124

D) $139

How much money must you pay into an account at the beginning of each of five years in order to have $5,000 at the end of the fifth year? Assume that the account pays 12% per year, and round to the nearest $10.

A) $700

B) $1,390

C) $1,550

D) $790

How much money must you pay into an account at the beginning of each of 11 years in order to have $5,000 at the end of the 11th year? Assume that the account pays 8% per year, and round to the nearest $1.

A) $700

B) $257

C) $300

D) $278

Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara

Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.

A) $1,250

B) $900

C) $1,866

D) $3,775

If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).

A) $630

B) $570

C) $650

D) $660

Which of the following is the formula for present value?

A) FVn = P(1 + i)n 

B) FVn = (1 + i)/P

C) FVn = P/(1 + i)n 

D) FVn = P(1 + i)-n 

All else constant, the present value of an investment will increase if

A) the investment is discounted at a higher interest rate. 

B) the investment is discounted for fewer years.

C) the investment is discounted at a lower interest rate.

D) both B and C.

Answer:  D

To find the present value of $1000 discounted for 20 years at 8%, when using a financial calculator, the correct entry is

A) N=20, i=.08,PMT = 0, FV=1000 solve for PV

B) N=20, i=8,PMT = 0, FV=1000 solve for PMT

C) N=20, i=.08,PMT = 0, PV=1000 solve for FV

D) N=20, i=8,PMT = 0, FV=1000 solve for PV

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

A) 73 months

B) 75 months

C) 77 months

D) 79 months

If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?

A) $648

B) $635

C) $634

D) $645

Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

A) 500(1 + .08)5 

B) 500(1 + .08)20 

C) 500(1 + .02)5 

D) 500(1 + .02)20 

What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

A) $1,048

B) $1,010

C) $1,038

D) $808

If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.

A) 10,000/(1 + .05)10 

B) 10,000/(1 + .005)120 

C) 10,000/(1 + .06)10 

D) 10,000/(1 + .006)120 

Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.

A) 15.5%

B) 4.2%

C) 9.8%

D) 10.6%

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

A) $827

B) $833

C) $828

D) $1,176

Which of the following is the formula for compound value?

A) FVn = P(1 + i)n 

B) FVn = (1 + i)/P

C) FVn = P/(1 + i)n 

D) FVn = P(1 + i)-n 

At 8% compounded annually, how long will it take $750 to double?

A) 6.5 years

B) 48 months

C) 9 years

D) 12 years

At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

A) 6%

B) 5%

C) 7%

D) 8%

An increase in future value can be caused by an increase in the

A) annual interest rate.

B) number of compounding periods.

C) original amount invested.

D) both A and B.

A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.

A) $1,444

B) $1,604

C) $1,764

D) $1,283

You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

A) $25,000

B) $31,060

C) $38,720

D) $34,310

If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

A) $72

B) $70

C) $71

D) $57