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Exam 9: The Time Value of Money

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Question 31

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Calculation of the yield of an investment provides the total return over multiple years.

A) True
B) False

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Question 32

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The future value of a $500 investment today at 8% annual interest compounded semiannually for five years is ________.

A) $805
B) $814
C) $740
D) $923

E) All of the above
F) A) and B)

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Question 33

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The interest factor for a future value (FV_IF) is equal to (1 + i)ⁿ_.

As the compounding rate becomes lower and lower, the future value of inflows approaches

The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% compounded for four years. How much total return will his investment earn during this time period?

If Allison has saved $1,000,000 upon retirement, how much money can she live on each year if she can earn 4% per year and will end with $0 when she expects to die 30 years after retirement?

Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 20 years. How much will she have available for retirement if she can make 8% on her investment?

Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?

Time value of money considers many changes to the value of the dollar such as interest, inflation, deflation, etc.

An annuity may best be defined as

Lou Lewis borrows $10,000 to be completely repaid over 10 years at 8%. Repayment of principal in the first year is ________.

The future value is the same concept as the way money grows in a bank account.

Cash flow decisions that ignore time value of money will probably not be as accurate as those decisions that do consider time value of money.

The concept of time value of money is important to financial decision making because

If a father and mother set aside a certain amount each year for their daughter's college fund, which table would be used to determine the amount necessary to be put away each year in order to reach a certain goal once the daughter attends college?

To save for a new car, Samuel Smith will invest $3,000 at the end of each year for the next 5 years. The interest rate is 8%. What is the future value?

The higher the interest rate used in determining the future value of a $1 annuity,

Time value of money can be calculated in a few different ways such as time value of money tables, calculator, excel, and/or equation, which all come up with a very similar answer.

The time value of money concept becomes less critical as the prime rate of lending increases.