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Homework answers / question archive / Question1)The present value of a lump sum future amount:                       Answers:   increases as the interest rate decreases

Question1)The present value of a lump sum future amount:                       Answers:   increases as the interest rate decreases

Finance

Question1)The present value of a lump sum future amount:

 

 

 

 

 

 

 

 

 

 

 

Answers:

 

increases as the interest rate decreases.
 

decreases as the time period decreases.
 

is inversely related to the future value.
 

is directly related to the interest rate.
 

is directly related to the time period.

 
  • Question 2

 

   
 

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

      

Answers:

Shortening the investment time period
 

Paying interest only on the principal amount
 

Paying simple interest rather than compound interest
 

Paying interest only at the end of the investment period rather than throughout the investment period
 

 

Increasing the interest rate

 

      
  • Question 3

 

   
 

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

      

Answers:

 

remain constant, regardless of the investment time period.
 

decrease if the investment time period is shortened.
 

decrease if the investment time period is lengthened.
 

be equal to $0.
 

be infinite in value.

 

      
  • Question 4

 

   
 

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

      

Answers:

Terry will earn the same amount of interest each year.
 

 

Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.
 

Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest.
 

Terry's interest for year two will be equal to $2,000 × 0.065 × 2.
 

Terry will be earning simple interest.

 

      
  • Question 5

 

   
 

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

      

Answers:

6 percent interest for 3 years
 

12 percent interest for 5 years
 

7 percent interest for 9 years
 

 

8 percent interest for 9 years
 

6 percent interest for 10 years

 

      
  • Question 6

 

   
 

Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct?

      

Answers:

The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.
 

The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal.
 

She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest.
 

The length of time she has to wait to reach her goal is directly related to the interest rate she earns.
 

 

The period of time she has to wait decreases as the amount she invests today increases.

 

      
  • Question 7

 

   
 

Imprudential, Inc., has an unfunded pension liability of $710 million that must be paid in 10 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present.

Required:

If the relevant discount rate is 4 percent, what is the present value of this liability?

      
       
  • Question 8

 

   
 

 You have just received notification that you have won the $2.04 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to collect), 76 years from now.

Required:

What is the present value of your windfall if the appropriate discount rate is 7 percent?

      
       
  • Question 9

 

   
 

You would like to be a millionaire when you retire in 40 years, and how much you must invest today to reach that goal clearly depends on what rate of return you can earn. First, suppose you can earn 10.7% per year, and calculate how much you would have to invest today. Second, suppose you can only earn half that percentage rate, and calculate how much you would have to invest today. Divide the second by the first, to see how many times more you must invest today at half that annual rate grow it to $1 million over 40 years. (Do not round the numbers in intermediate calculations, but enter your answer rounded to 2 decimal places (for example, 2.31).)

      

 

      
  • Question 10

 

   
 

 

You have just made your first $5,000 contribution to your individual retirement account. Assume you earn a 10.80 percent rate of return and make no additional contributions.

 

 

What will your account be worth when you retire in 44 years? 
     
       
  • Question 11

 

   
 

You need $85,481 in 9 years.

 

Required:

If you can earn 0.55 percent per month, how much will you have to deposit today?
     
       
  • Question 12

 

   
 

 

You have $6,800 to deposit. Regency Bank offers 6 percent per year compounded monthly (0.50 percent per month), while King Bank offers 6 percent but will only compound annually.

 

Required:

How much will your investment be worth in 20 years at each bank?

 

For Regency Bank: [x]

For King Bank:[y]
     

 

 

 

 

  
     
  • Question 13

 

   
 

Assume a bronze sculpture sold in 2003 at auction for a price of $10,332,500. Unfortunately for the previous owner, he had purchased it in 1999 at a price of $12,380,500.

 

Required:

What was his annual rate of return on this sculpture?
     
       
  • Question 14

 

   
 

 

On March 28, 2008, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $100,000 on March 28, 2028, but investors would receive nothing until then. Investors paid DMF $24,299 for each of these securities; so they gave up $24,299 on March 28, 2008, for the promise of a $100,000 payment 20 years later.


(a) Based on the $24,299 price, what rate was DMF paying to borrow money? [x]

(b) Suppose that, on March 8, 2018, this security’s price is $39,783. If an investor had purchased it for $24,299 at the offering and sold it on this day, what annual rate of return would she have earned?[y]

(c) If an investor had purchased the security at market on March 8, 2018, and held it until it matured, what annual rate of return would she have earned?[z]

      
 

 

      
  • Question 15

 

   
 

 

You can earn 0.50 percent per month at your bank.

 

Required:

If you deposit $2,963, how many months must you wait until your account has grown to $4,348? 
     

 
     

 

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