1. You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $6,000. You plan to put
down $1,000 and borrow $5,000. You will need to make annual payments of $1,300 at the end of each year. Show the
timeline of the loan from your perspective. How would the timeline differ if you created it from the bank's perspective?
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Show the timeline of the loan from your perspective. (Select the best choice below.)
A. Year
Cash Flow
B. Year
0
1
2
3
4
5
$6,000
– $1,300
– $1,300
– $1,300
– $1,300
– $1,300
0
1
2
3
4
5
$1,300
$1,300
$1,300
$1,300
$1,300
0
1
2
3
4
5
$5,000
– $1,300
– $1,300
– $1,300
– $1,300
– $1,300
0
1
2
3
4
5
$1,300
$1,300
$1,300
$1,300
$1,300
Cash Flow – $5,000
XC. Year
Cash Flow
D. Year
Cash Flow – $1,000
How would the timeline differ if you created it from the bank's perspective? (Select the best choice below.)
A. Year
0
1
2
3
4
5
$1,300
$1,300
$1,300
$1,300
$1,300
1
2
3
4
5
$1,300
$1,300
$1,300
$1,300
$1,300
0
1
2
3
4
5
$6,000
– $1,300
– $1,300
– $1,300
– $1,300
– $1,300
0
1
2
3
4
5
$5,000
– $1,300
– $1,300
– $1,300
– $1,300
– $1,300
Cash Flow – $1,000
XB. Year
0
Cash Flow – $5,000
C. Year
Cash Flow
D. Year
Cash Flow
2. Your brother has offered to give you either $60,000 today or $120,000 in 10 years. If the interest rate is 4% per year, which
option is preferable?
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What is the present value of the future amount (amount received in 10 years)?
The present value is $
. (Round to the nearest dollar.)
Which option is preferable? (Select the best choice below.)
A. Take the present amount offered because it is greater than the present value of the future amount.
B. Take the present amount offered because it is less than the future amount.
C. Take the future amount because its present value is greater than the present amount offered.
D. Take the future amount because the larger amount is always worth more no matter when you
receive it.
3. Consider the following alternatives:
i. $150 received in one year
ii. $250 received in 5 years
iii. $300 received in 10 years
a. Rank the alternatives from most valuable to least valuable if the interest rate is 9% per year.
b. What is your ranking if the interest rate is only 2% per year?
c. What is your ranking if the interest rate is 18% per year?
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a. Rank the alternatives from most valuable to least valuable if the interest rate is 9% per year.
(Select the best choice below.)
A. The ranking of the projects is: option ii > option iii > option i.
B. The ranking of the projects is: option iii > option i > option ii.
C. The ranking of the projects is: option ii > option i > option iii.
D. The ranking of the projects is: option i > option ii > option iii.
b. What is your ranking if the interest rate is only 2% per year?
(Select the best choice below.)
A. The ranking of the projects is: option iii > option i > option ii.
B. The ranking of the projects is: option ii > option iii > option i.
C. The ranking of the projects is: option i > option ii > option iii.
D. The ranking of the projects is: option iii > option ii > option i.
c. What is your ranking if the interest rate is 18% per year?
(Select the best choice below.)
A. The ranking of the projects is: option ii > option i > option iii.
B. The ranking of the projects is: option i > option iii > option ii.
C. The ranking of the projects is: option i > option ii > option iii.
D. The ranking of the projects is: option iii > option ii > option i.
4. Your daughter is currently 9 years old. You anticipate that she will be going to college in 9 years. You would like to have
$124,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of
11% per year, how much money do you need to put into the account today to ensure that you will have $124,000 in 9
years?
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Your deposit today should be $
. (Round to the nearest dollar.)
5. Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are
allowed to withdraw the money for the first time. The account currently has $6,190 in it and pays a(n) 5% interest rate.
a. How much money would be in the account if you left the money there until your 25th birthday?
b. How much would be in your account if you left the money in the account until your 65th birthday?
c. How much money did your grandfather originally put in the account?
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a. How much money would be in the account if you left the money there until your 25th birthday?
The future value is $
. (Round to the nearest dollar.)
b. How much would be in your account if you left the money in the account until your 65th birthday?
The future value is $
. (Round to the nearest dollar.)
c. How much money did your grandfather originally put in the account?
The present value is $
. (Round to the nearest dollar.)
6. You have just received a windfall from an investment you made in a friend's business. He will be paying you $40,623 at the
end of this year, $81,246 at the end of the following year, and $121,869 at the end of the year after that (three years from
today). The interest rate is 14.9% per year.
a. What is the present value of your windfall?
b. What is the future value of your windfall in three years (on the date of the last payment)?
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a. What is the present value of your windfall?
The present value of your windfall is $
. (Round to the nearest dollar.)
b. What is the future value of your windfall in three years (on the date of the last payment)?
The future value of your windfall in three years is $
. (Round to the nearest dollar.)
7. The British government has a consol bond outstanding paying £300 per year forever. Assume the current interest rate is
8% per year.
a. What is the value of the bond immediately after a payment is made?
b. What is the value of the bond immediately before a payment is made?
What is the value of the bond immediately after a payment is made?
The value of the bond immediately after a payment is made is £
. (Round to the nearest pound.)
What is the value of the bond immediately before a payment is made?
The value of the bond immediately before a payment is made is £
. (Round to the nearest pound.)
8. When you purchased your house, you took out a 30-year annual-payment mortgage with an interest rate of 6% per year.
The annual payment on the mortgage is $8,836. You have just made a payment and have now decided to pay the mortgage
off by repaying the outstanding balance.
a. What is the payoff amount if you have lived in the house for 14 years (so there are 16 years left on the mortgage)?
b. What is the payoff amount if you have lived in the house for 21 years (so there are 9 years left on the mortgage)?
c. What is the payoff amount if you have lived in the house for 14 years (so there are 16 years left on the mortgage) and you
decide to pay off the mortgage immediately before the 14 th payment is due?
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a. What is the payoff amount if you have lived in the house for 14 years (so there are 16 years left on the mortgage)?
Payoff amount is $
. (Round to the nearest dollar.)
b. What is the payoff amount if you have lived in the house for 21 years (so there are 9 years left on the mortgage)?
Assume the same payment of $8,836 per year and an interest rate of 6% (also per year).
Payoff amount is $
. (Round to the nearest dollar.)
c. What is the payoff amount if you have lived in the house for 14 years (so there are 16 years left on the mortgage) and you
decide to pay off the mortgage immediately before the 14 th payment is due? Assume the same payment of $8,836 per year
and an interest rate of 6% (also per year).
Payoff amount is $
. (Round to the nearest dollar.)
9. You are 26 years old and decide to start saving for your retirement. You plan to save $5,000 at the end of each year (so the first
deposit will be one year from now), and will make the last deposit when you retire at age 67. Suppose you earn 4% peryear
on your retirement savings.
a. How much will you have saved for retirement?
b. How much will you have saved if you wait until age 40 to start saving (again, with your first deposit at the end of the
year)?
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a. How much will you have saved for retirement?
The amount that you will have accumulated for retirement is $
. (Round to the nearest dollar.)
b. How much will you have saved if you wait until age 40 to start saving (again, with your first deposit at the end of the
year)?
The amount that you will have accumulated for retirement is $
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. (Round to the nearest dollar.)
10. A rich relative has bequeathed you a growing perpetuity. The first payment will occur in one year and will be $2,000. Each
year after that, you will receive a payment on the anniversary of the last payment that is 2% larger than the last payment.
This pattern of payments will go on forever. If the interest rate is 16% per year,
a. What is today's value of the bequest?
b. What is the value of the bequest immediately after the first payment is made?
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a. What is today's value of the bequest?
Today's value of the bequest is $
. (Round to the nearest dollar.)
b. What is the value of the bequest immediately after the first payment is made?
The value of the bequest immediately after the first payment is made is $
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. (Round to the nearest dollar.)
11. Your oldest daughter is about to start kindergarten in a private school. Tuition is $30,000 per year, payable at the beginning
of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase
at a rate of 4% per year over the 13 years of her schooling. What is the present value of your tuition payments if the
interest rate is 4% per year? How much would you need to have in the bank now to fund all 13 years of tuition?
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The present value is $
. (Round to the nearest dollar.)