Faculty of Management Sciences, IIUI

Time Value of Money Problems

1. What will a deposit of $4,500 at 10% compounded semiannually be worth if left in the bank for
six years
a. $!,0"0.""
b. $#,$5$.55
c. $!,0!1.55
d. $!,1!1.55
". What will a deposit of $4,500 at #% annual interest be worth if left in the bank for nine years
a. $!,"#%."5
b. $!,%!5.#!
c. $!,"#$."%
d. $#,#"%."5
%. What will a deposit of $4,500 at 1"% compounded monthly be worth at the end of 10 years
a. $14,%51.!0
b. $14,!51.!0
c. $1%,$$#.40
d. $14,%04.!0
4. &ow much will $1,000 deposited in a sa'in(s account earnin( an annual interest rate of ) percent
be worth at the end of 5 years
a. $1,%%!
b. $1,%4!
c. $1,%!!
d. $1,4%!
5. &ow much will $1,000 deposited in a sa'in(s account earnin( a compound annual interest rate of
) percent be worth at the end of % years
a. $1,1$$
MBA 26 (A&B) Page 1
b. $1,1$1
c. $1,!$1
d. $1,%!$
Faculty of Management Sciences, IIUI
). *i'en an annual opportunity cost of 10%, what is the future 'alue of a $1,000 ordinary annuity
for 1 year
a. $1,"00
b. $1,1"0
c. $1,100
d. $1,"10
#. *i'en an annual opportunity cost of 10%, what is the future 'alue of a $1,000 ordinary annuity
for 10 years
a. $15,$%#
b. $15,#%$
c. $10,000
d. $1",000
!. +f you re,uire a $ percent annual return on your in'estments, you would prefer $15,000 fi'e
years from today rather than an ordinary annuity of $1,000 per year for 15 years.
a. -rue
b. .alse
$. &ow lon( does it take for $5,000 to (row into $),#"4.44 at 10% compounded ,uarterly
a. " years.
b. % years.
c. 4 years.
d. %0 months.
10. &ow lon( does it take for $!5) to (row into $1,1"" at an annual interest rate of #%
a. " years.
b. ) years.
c. 4 years.
d. %0 months.
11. &ow much will an ordinary annuity of $)50 per year be worth in ei(ht years at an annual
interest rate of ) percent
MBA 26 (A&B) Page 3
a. $!,$#5.%!
b. $),!$#.#)
c. $#,0"1.!0
d. $),4%%.%!
Faculty of Management Sciences, IIUI
1". &ow much will an ordinary annuity of $)50 per year be worth in ei(ht years at an annual
interest rate of ! percent
a. $4,!00."#
b. $),%)).10
c. $),$1%.#$
d. $),!"".#$
1%. &ow much must you deposit at the end of each year in an account that pays an annual interest
rate of "0 percent, if at the end of 5 years you want $10,000 in the account
a. $1,500
b. $1,"50.))
c. $1,%$%.4#
d. $1,%4%.#"
14. -he Winter(reens are plannin( ahead for their son/s education. &e/s ei(ht now and will start
colle(e in 10 years. &ow much will they ha'e to set aside at the end of each year to ha'e $)5,000 in
10 years if the annual interest rate is #%
a. $4,#04.55
b. $4,500
c. $%,$#5.!$
d. $4,)"4.55
15. What annual interest rate would you need in order to ha'e an ordinary annuity of $#,500 per
year accumulate to $"#$,)00 in 15 years
a. !.#5%
b. 10."%
c. 1"%
d. 14%
1). What annual interest rate is implied if you lend someone $1,!50 and are repaid $",0#!.)) in two
years
a. 4%
b. 5%
MBA 26 (A&B) Page 5
c. )%
d. 5.5%
Faculty of Management Sciences, IIUI
1#. What nominal annual interest rate is implied if you borrow $1",500 and repay $"1,%)4."4 in
three years with monthly compoundin(
a. 1"%
b. 15%
c. 1#%
d. 1!%
1!. 0ou ha'e $10,000 to in'est. 1ssumin( annual compoundin(, how lon( will it take for the
$10,000 to double if it is in'ested at an annual interest rate of 14 percent
a. ) years.
b. 4.5 years.
c. 5."$ years.
d. ).14 years.
1$. -he -ried and -rue 2orporation had earnin(s of $0."0 per share in 1$#!. 3y 1$$5, a period of
1# years, its earnin(s had (rown to $1.01 per share. What was the compound annual rate of (rowth
in the company/s earnin(s
a. 11%
b. 10%
c. 1"%
d. 11.5%
"0. What is the present 'alue of $!00 to be recei'ed at the end of ! years, assumin( an interest
rate of "0 percent, ,uarterly compoundin(
a. $1)5.00
b. $1#".%$
c. $1)#.!$
d. $1)$.!$
"1. What is the present 'alue of $!00 to be recei'ed at the end of ! years, assumin( an annual
interest rate of ! percent
a. $4"5
b. $4%"
c. $441
MBA 26 (A&B) Page 7
d. $4%#
Faculty of Management Sciences, IIUI
"". What would you pay for an ordinary annuity of $",000 paid e'ery six months for 1" years if you
could in'est your money elsewhere at a nominal interest rate of 10% compounded semiannually
a. $1%,#$!.)0
b. $"5,500.%5
c. $"#,5$#."0
d. $"),$5#."0
"%. -hirty years a(o, 4esse 4ones bou(ht 10 acres of land for $1,000 per acre in what is now
downtown &o uston. +f this land (rew in 'alue at an annual interest rate of ! percent, what is it worth
today
a. $100,)%0
b. $1!0,)%0
c. $100,$00
d. $101,)%0
"4. What would you be willin( to pay for a $1,000 bond payin( $#0 interest at the end of each year
and maturin( in "5 years if you wanted the bond to yield an annual interest rate of # percent
56ote7 1t maturity, the bond will be retired and the holder will recei'e $1,000 in cash. 3onds
typically are issued with $1,000 face, or par, 'alues. -he actual market 'alue at any point in time
will tend to rise as interest rates fall and fall as interest rates rise.8
a. $1,100
b. $$5!
c. $1,000
d. $$#$
"5. What would you be willin( to pay for a $1,000 bond payin( $#0 interest at the end of each year
and maturin( in "5 years if you wanted the bond to yield an annual interest rate of 1" percent
56ote7 1t maturity, the bond will be retired and the holder will recei'e $1,000 in cash. 3onds
typically are issued with $1,000 face, or par, 'alues. -he actual market 'alue at any point in time
will tend to rise as interest rates fall and fall as interest rates rise.8
a. $)01.0!
b. $)0!.01
c. $)0#.41
d. $#01.0!
MBA 26 (A&B) Page 9
"). 1 $10,000 car loan has payments of $%)1.5" due at the end of each month for three years.
What is the nominal interest rate
a. 15%
b. 1!%
c. 1)%
d. 10%
"#. 4oe .erro/s uncle is (oin( to (i'e him $"50 a month for the next two years startin( today. +f 4oe
deposits e'ery payment in an account payin( a nominal annual interest rate of )% compounded
monthly, how much will he ha'e at the end of three years
a. $),$#)."5
b. $),!%#."!
c. $),%!$.#$
d. $),#$)."%
"!. .ind the present 'alue of $1,000 to be recei'ed at the end of " years at a 1"% nominal annual
interest rate compounded ,uarterly.
a. $#$5
b. $#!$
c. $#)#
d. $##$
"$. .ind the present 'alue of $1,000 to be recei'ed at the end of 4 years at a nominal annual
interest rate of 1"%, compounded semiannually.
a. $)"#
b. $)%#
c. $)#5
d. $)""
%0. *i'en a 15% annual opportunity cost, $1.00 three years from now is worth more than $".00
nine years from now.
a. -rue
b. .alse
Faculty of Management Sciences, IIUI
%1. 0our (reat9uncle 2laude is !" years old. :'er the years, he has accumulated sa'in(s of
$!0,000. &e estimates that he will li'e another 10 years at the most and wants to spend his sa'in(s
by then. 5+f he li'es lon(er than that, he fi(ures you will be happy to take care of him.8 ;ncle 2laude
places his $!0,000 into an account earnin( 10 percent annually and sets it up in such a way that he
will be makin( 10 e,ual annual withdrawals 5the first one occurrin( 1 year from now8 such that his
account balance will be <ero at the end of 10 years. &ow much will he be able to withdraw each
year
a. $1%,1!0.#1
b. $1%,)14.50
c. $1",$!$.""
d. $1%,01$.)%
%". 0our parents ha'e disco'ered a $1,000 bond at the bottom of their safe deposit box. -he bond
was (i'en to you by your late (reat9aunt &ilda on your second birthday. -he bond pays an annual
interest rate of 5 percent. +nterest accumulates and is paid at the time the bond is redeemed. 0ou
are now "# years old. What is the current worth of the bond 5principal plus interest8
a. $%,500
b. $%,4"1
c. $%,%"#
d. $%,%!)
%%. 0our mother is plannin( to retire this year. &er firm has offered her a lump sum retirement
payment of $50,000 or a $),000 lifetime ordinary annuity9whiche'er she chooses. 0our mother is in
reasonably (ood health and expects t o li'e for at least 15 more years. Which option should she
choose, assumin( that an ! percent annual interest rate is appropriate to e'aluate the annuity
a. $51,%54
b. $5",5%5
c. $51,!)"
d. $5",%"!
%4. 1 life insurance company has offered you a new =cash (rower= policy that will be fully paid up
when you turn 45. 1t that time, it will ha'e a cash surrender 'alue of $1!,000. When you turn )5,
the policy will ha'e a cash surrender 'alue of $%#,#"!. What annual rate of interest is the insurance
company promisin( you on your in'estment
a. %%
b. 4.4%
c. %.!%
MBA 26 (A&B) Page 11
d. 4.1%
Faculty of Management Sciences, IIUI
%5. >trikler, +nc. has issued a $10 million, 109year bond issue. -he bonds re,uire >trikler to establish
a sinkin( fund and make 10 e,ual, end9of9year deposits into the fund. -hese deposits will earn !
percent annually, and the sinkin( fund should ha'e enou(h accumulated in it at the end of 10 years
to retire the bonds. What are the annual sinkin( fund payments
a. $)!$,"$4
b. $)##,"$4
c. $)$0,"$4
d. $)!$,%4"
%). 1 3aldwin ;nited 2ompany a(ent has ?ust presented the followin( offer. +f you deposit $"5,000
with the firm today, it will pay you $10,000 per year at the end of years ! throu(h 15. +f you re,uire
a 15 percent annual rate of return on this type of in'estment, would you make this in'estment
a. $1),!#1
b. $15,!#1
c. $1),!5"
d. $1),$11
%#. @etermine the 'alue at the end of % years of a $10,000 in'estment 5today8 in a bank certificate
of deposit 52@8 that pays a nominal annual interest rate of ! percent, compounded monthly.
a. $1",)4".%#
b. $1",#0".%#
c. $1%,)5"."#
d. $1",!1".%#
%!. @etermine the 'alue at the end of % years of a $10,000 in'estment 5today8 in a bank certificate
of deposit 52@8 that pays a nominal annual interest rate of ! percent, compounded semiannually.
a. $1%,)5".1$
b. $1%,#51."1
c. $1",)5%.1$
d. $1",5)%."1
%$. 1n in'estment re,uires an outlay of $100,000 today. 2ash inflows from the in'estment are
expected to be $40,000 per year at the end of years 4, 5, ), #, and !. +f you re,uire a "0 percent
annual rate of return on this type of in'estment, should the in'estment be undertaken
a. 0es
MBA 26 (A&B) Page 13
b. 6o
40. 2alculate the present 'alue of a perpetuity bond that is expected to pay $50 of interest per
year if the in'estor re,uires an annual return of ! percent.
a. $)"5
b. $)55
c.
$5)5
d.
$)0"
41. >te'en White is considerin( takin( early retirement, ha'in( sa'ed $400,000. White desires to
determine how many years the sa'in(s will last if $40,000 per year is withdrawn at the end of
each year. White feels the sa'in(s can earn 10 percent per year.
a. 1"
years. b.
15 years.
c. 14.5 years.
d. 10 years.
4". What is the monthly rate of interest that will yield an annual effecti'e interest rate of
1" percent
a. 1.4$$%
b. 0.$4$%
c. 0.$5%%
d. 1.$4$%
MBA 26 (A&B) Page 15