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Exam 4: The Time Value of Money

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Question 41

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Which of the following statements is false?

A) The process of moving a value or cash flow forward in time is known as compounding.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) A dollar in the future is worth more than a dollar today.

E) All of the above
F) None of the above

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Question 42

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Henry Rearden is saving for retirement and has determined that to live comfortably he must save $3 million by his 65 birthday.Henry just turned 30 today,and he has decided that starting today and continuing on every birthday up to and including his 65th birthday,he will deposit the same amount into an individual retirement account (IRA) .If Henry can earn 8% on his IRA,then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65th birthday is closest to:

A) $16,035
B) $17,410
C) $83,335
D) $85,715

E) B) and C)
F) A) and B)

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Question 43

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Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assume that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education.

Consider the following timeline: If the current market rate of interest is 7%,then the future value of this timeline as of year 3 is closest to:

Use the information for the question(s) below. Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. -The present value (at age 30) of your retirement savings is closest to:

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Consider the following time line: If the current market rate of interest is 8%,then the present value of this timeline is closest to:

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assuming that costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters college will be closest to:

Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that you son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%) per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:

At an annual interest rate of 7%,the present value of this timeline in year 0 is closest to:

Which of the following statements regarding annuities is false?

Which of the following statements regarding perpetuities is false?

Which of the following statements is false?

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years.The IRR of this opportunity is closest to:

Use the table for the question(s) below. -Draw a timeline detailing the cash flows from investment "A."

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months) at 9% APR (0.75% month) .If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years of $1,000,000 each.The bank has offered to allow Taggart Transcontinental to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years.If the interest rate on the loan is 6%,then the final payment that the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Consider the following timeline: If the current market rate of interest is 9%,then the present value of this timeline as of year 0 is closest to:

Which of the following formulas is incorrect?