Chapter 5 The Time Value of Money

28) 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).

A) $8,459

B) $10,106

C) $10,387

D) $11,129

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

A) 18,151

B) 14,356

C) 16,987

D) 15,555

30) 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) 18,001

B) 18,207

C) 19,112

D) 19,344

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

A) 40 periods at 4%.

B) 5 periods at 12%.

C) 10 periods at 4%.

D) 80 periods at 2%.

32) Andre'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 10.9% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?

A) $27,560

B) $30,028

C) $33,307

D) $43,730

33) 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 18th birthday) and each year for three additional years to spend on his education, assuming that the account now earns 7% annually.

A) $8,285

B) $8,865

C) $9,486

D) $30,028

34) 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?

A) 200.00%

B) 34.93%

C) 30.47%

D) 20.00%

35) 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 semiannually; 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?

A) Last National Bank's loan

B) Local Bank's loan

C) Credit Onion's loan

D) All of the loans will have the same annual cost.

36) 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.

Learning Objective 4

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