Chapter 5 The Time Value of Money

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

3) 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

A) take the $60,000 today because of the time value of money regardless of current interest rates.

B) take option two because you get $70,000 rather than $60,000 regardless of current interest rates.

C) take the $60,000 today only if the current interest rate is at least 16.67%

D) take the $60,000 today if you can earn 6.81% per year or more on your investments

4) You have a savings bond that will be worth $750 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)?

A) $675

B) $648

C) $625

D) $612

5) 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

A) $877.11.

B) $1,000.00.

C) $416.39.

D) $1,785.67.

6) 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?

A) 0.055

B) 0.010

C) 0.110

D) 0.220

7) What is the value on 1/1/13 of the following cash flows:

Date Cash Received Amount of Cash

1/1/14 $14,000

1/1/15 $20,000

1/1/16 $30,000

1/1/17 $43,000

1/1/18 $57,000

Use a 7% discount rate, and round your answer to the nearest $10.

A) $153,270

B) $128,490

C) $112,350

D) $107,330

8) 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 7%, what is the market value of the bond?

A) over $1,000

B) under $1,000

C) exactly $1,000

D) cannot be determined from the information given

9) 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%?

A) $735

B) $864

C) $885

D) $900

10) 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

1 $350

2 $500

3 $725

4 $400

A) $1,622

B) $2,207

C) $2,384

D) $2,687

11) 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?

A) $1,276

B) $1,359

C) $1,462

D) $1,338