FNCE 370 - Lesson 4: Time Value of Money

Lesson 4: Time Value of Money

Question 1 You have just won the lottery. The Lottery Corporation offers you two options:

· a lump-sum payment of $1 million, or

· an annual installment of $100,000 over the next 15 years.

At what interest rate, r, will you be indifferent between the two options?

Select one:

a. 10.00%

b. 7.75%

c. 5.56%

d. 2.74%

e. 50.00%

Question 5Juliet has a 10-year mortgage of $500,000 with an interest rate of 3.5% APR, compounded quarterly. Mortgage payments are made at the beginning of each month. What is the balance remaining on this mortgage after the 60th payment?

Select one:

a. $216,077

b. $270,937

c. $275,065

d. $266,797

e. $250,000

Question 6

A 10-year investment will pay $1,800 at the end of this year, and the payments will grow at a rate of 5% per year. The required return is 12%. What is the present value of this investment?

Select one:

a. $5,590.53

b. $6,985.47

c. $10,170.40

d. $12,228.16

e. $25,714.29

Question 7

An investment will pay $225 per year (indefinitely), starting in one year's time. The annual payments will grow at a rate of 3% per year. If the price of this investment is $2,000, what is its rate of return?

Select one:

a. 11.25%

b. 14.00%

c. 14.25%

d. 15.00%

e. 17.25%

Question 8

Mike Smith just turned 16 years old. He wishes to buy a used car in two years, and he is willing to spend $8,000. He plans to work part-time and put all his monthly earnings into a bank account that will pay 0.25% interest per month. How much must he save per month in order to be able to purchase the car in two years?

Select one:

a. $754.72

b. $416.67

c. $405.33

d. $333.33

e. $323.85

Question 9Given the following information, calculate the rate of return.

Price = $282.51 Time to maturity = 10 years Annual payment = $50 Type = annuity due

Select one:

a. 10.00%

b. 11.65%

c. 12.00%

d. 15.73%

e. 17.70%

Question 10What is the effective annual rate on an investment that pays an interest of 6.25% continuously?

Select one:

a. 6.45%

b. 6.72%

c. 6.35%

d. 4.47%

e. 8.68%