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Finance 201 > Midterm Exam 2 Pt. 2 > Flashcards

Midterm Exam 2 Pt. 2 Flashcards

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1
Q

What is a TIP

A

Treasury inflation protected security

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2
Q

How does a TIP work?

A

They protect investors against inflation, I’m not sure how

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3
Q

What is another name for the Term Structure of Interest rates?

A

Yield Curve

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4
Q

True or False: The greater the time to maturity, the greater the risk

A

True

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5
Q

What is the perpetuity formula?

A

PV = PMT/i

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6
Q

What is the purpose of learning TVM?

A

Being able to evaluate cash flows over time in order to make better decisions.

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7
Q

What does time value of money mean?

A

The value of money changes as time passes.

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8
Q

What factors make it better to receive money NOW instead of in the future?

A

Risk
Opportunity (you could use it to invest now)
Inflation

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9
Q

Define present value

A

How much spending power money has TODAY

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10
Q

Discount rate equation

A

Discount rate = risk free rate + risk premium

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11
Q

Compounding

A

Finding the FV

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12
Q

Discounting

A

Finding the PV

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13
Q

Other names for the Discount Rate

A

Cost of capital, required rate of return, interest rate

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14
Q

In order to determine the future value of some lump sum, we must use the process of _________________.

A

Compounding

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15
Q

If we were to receive some lump sum in the future and we wanted to determine the value of the lump sum in today’s dollars, we must _______________ this future cash flow.

A

Discount

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16
Q

The discount rate consists of the risk free rate plus the risk premium.

A

True

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17
Q

Would you rather have $100,000 today or $100,000 one year from today?

A

Rather have $100,000 TODAY

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18
Q

What is the most important thing to remember for the test?

A

REMEMBER YOUR CONVERSIONS!!! If you switch to semi annual or monthly payments, DOUBLE CHECK YOUR ANSWERS!!!

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19
Q

If you will receive $100 one year from now, what is the present value (PV) of that $100 today if your opportunity cost is 6%? What if the $100 is to be received 5 years from now?

A

$94.34
$74.73

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20
Q

Holding all else equal, the more discounting periods of a lump sum received in the future, the ______________ the present value of the lump sum.

A

Smaller

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21
Q

Suppose you invested $20,000 today into an account that will pay 10% per year. What will the value of the investment be in 15 years?

A

$83,545

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22
Q

Suppose you expect to obtain $40,000 in 10 years from today. If the discount rate is 8%, then the value of this $40,000 will be __________________ in today’s dollars.

A

$18,528

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23
Q

Suppose that today, you invested a $100,000 into a certificate of deposit that pays 5% per year. How much would your investment be worth 40 years from today?

A

$703,998.87

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24
Q

Suppose you plan to receive $50,000 30 years from today. If the appropriate discount rate is 10%, what is the present value of $50,000?

A

$2,865.43

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25
Q

Holding all else equal, the future value of a lump sum will be ______________ if the interest rate is larger.

A

Larger

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26
Q

The present value of a lump sum that will be received in the future will be ______________ if the interest rate is larger.

A

Smaller

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27
Q

Holding all else equal, the future value of a lump sum will be ______________ if the number of time periods is larger.

A

Larger

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28
Q

Holding all else equal, the future value of a lump sum will be ______________ if the size of the lump sum is increased.

A

Larger

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29
Q

Suppose you invested $15,000 today into an account that will pay 12% per year. What will the value of the account be in 40 years?

A

$1,395,765

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30
Q

Suppose you invested $3,500 today into an account that will pay 15% per year. What will the value of the account be in 35 years?

A

$466,114

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31
Q

Suppose you expect to obtain $1,250,000 in 25 years from today. If the discount rate is 12%, then the value of this $1,250,000 will be __________________ in today’s dollars.

A

$73,529

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32
Q

(Compound interest) What will be the FV of the following investment? (end mode)

Initial investment  of $1,000 for 20 years at 7% compounded annually
A

$3869.68

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33
Q

(Compound value solving for i) At what annual rate would the following have to be invested?

$12,000 to grow to $25,000 in 13 years
A

5.81%

34
Q

(Compound value solving for i) At what annual rate would the following have to be invested?

$150,000 to grow to $300,000 in 30 years
A

2.34%

35
Q

(Compound value solving for i) At what annual rate would the following have to be invested?

$1,000 to grow to $2,700 in 5 years
A

21.98%

36
Q

(Compound value solving for i) At what annual rate would the following have to be invested?

$25,000 to grow to $2,000,000 in 50 years
A

9.16%

37
Q

(Compound value solving for n) How many years will it take to get the following (round your answer to the nearest year):

$100,000 to become $1,000,000 at  7% compounded annually
A

34 years

38
Q

(Compound value solving for n) How many years will it take to get the following (round your answer to the nearest year):

$2,100 to become $5,200 at 12% compounded annually
A

8 years

39
Q

(Present value) What is the present value of the following amount?

$100,000 received 45 years from now discounted at a rate of 3% annually
A

$26,443.86

40
Q

(Present value) What is the present value of the following amount?

$250,000 received 15 years from now discounted at a rate of 2.5% annually
A

$172,616.39

41
Q

(Present value) What is the present value of the following amount?

$1,000,000 received 35 years from now discounted at a rate of 3.5% annually
A

$299,976.86

42
Q

(Present value) What is the present value of the following amount?

$2,500,000 received 55 years from now discounted at a rate of 4% annually
A

$289,138.78

43
Q

(Compound value) Amelia just received her annual performance bonus at her job of $15,000. She decides to put it in a savings account at her local bank which pays a 2% annual yield.

How much money will she have accrued after 15 years?
A

$20,188.03

44
Q

(Compound value) Amelia just received her annual performance bonus at her job of $15,000. She decides to put it in a Certificate of Deposit (CD) that would receive a yield of 5% annually. How much money will she have accrued after 15 years?

A

$31,183.92

45
Q

Suppose that today, you invested $100,000 into a certificate of deposit that pays 5% per year. How much would your investment be worth 4 years from today?

A

$121,550.63

46
Q

How much would your $100,000 investment be worth one year from today? Assume the account the money is invested in has a 5% annual return.

A

$105,000

47
Q

Suppose you plan to receive $50,000 ten years from today, if the appropriate discount rate is 10%, what is the present value of $50,000?

A

$19,277.17

48
Q

Suppose you plan to receive $50,000 ten years from today, if the appropriate discount rate is 25%, what is the present value of $50,000?

A

$5,368,71

49
Q

What is an annuity?

A

An equally spaced sequence of cash flows. Think of car loans, mortgage payments, and bonds, etc.

50
Q

Deferred annuity

A

An annuity that starts in the future instead of now (like 5 years from now, think of student loan payments)

51
Q

What is FVIFA

A

Future value interest factor for an annuity

52
Q

Future value of annuity equation

A

FV = PMT x {(1+i)^n - 1 / i}

53
Q

What is the PV of $1,000 at the end of each of the next 3 years, if the opportunity cost is 8%?

A

$2577.10
(1000 is the PMT)

54
Q

Ordinary annuity

A

There’s only a one period delay between the start of the period and the time of the first payment (using END)

55
Q

APR

A

Annual percentage rate

56
Q

Suppose you are the CFO of a firm that has borrowed $10,000,000 at a rate of 8% (remember, unless stated otherwise, interest rates are always given as annual rates). The quarterly payments are $365,557.48. How many years will it be until the loan is repaid?

A

10

57
Q

APY

A

Annual percentage yiedl

58
Q

What is another name for APY?

A

Effective yield

59
Q

What is an effective yield

A

It has non-annual compounding periods

60
Q

Effective yield equation

A

Effective yield = (1+ i/m)^m - 1
i = annual interest rate
m = # of compounds per year

61
Q

Suppose you can afford to invest $1,000 each month into an account that pays 12% per year. How many years will you need to make this monthly investment for your account to be worth $1,000,000? (Assume the first investment will begin one month from today)

A

20.08 years

62
Q

Suppose you plan to invest $5,000 each year (beginning at the end of this year) into a retirement account that will pay 12%. What will be the value of the retirement account if you plan to retire in 30 years? (Assume the retirement account has a zero balance currently.)

A

$1,206,663.42

63
Q

A bank recently quoted you an annual interest rate of 5% on an automobile loan for a new sedan that is currently priced at $28,950. If the length of the loan is 6 years (or 72 months), what will your monthly payment be?

A

$466.24

64
Q

If current automobile loans have a 5% annual interest rate on 6 years, and you can only afford a $230 monthly payment, how much of an automobile can you afford?

A

$14,281.34

65
Q

What is the effective yield (as a decimal) on the automobile loans with an annual interest rate of 5% that compounds monthly?

A

5.12%

66
Q

If you were to begin investing $5,000 each year, beginning one year from today, into an account that paid 15% per year, then how much will the account be worth after 35 years?

A

$4,405,851

67
Q

At what discount rate, will the present value of a $10,000 ordinary annuity payment for 5 years be worth $35,000 today?

A

13.20%

68
Q

If you were to invest $10,000 each year for the next 20 years, then what rate of return is required for your investment to be worth $1,000,000? (Assume the first payment will begin one year from today)

A

14.80%

69
Q

Suppose you plan to invest $5,000 each year (beginning at the end of this year) into a retirement account that will pay 12%. What will be the value of the retirement account if you plan to retire in 40 years? (Assume the retirement account has a zero balance currently.)

A

$3,835,457.10

70
Q

Suppose you plan to invest $5,000 each year (beginning at the end of this year) into a retirement account that will pay 15%. What will be the value of the retirement account if you plan to retire in 30 years? (Assume the retirement account has a zero balance currently.)

A

$2,173,725.73

71
Q

Suppose you plan to invest $5,000 each year (beginning at the end of this year) into a retirement account that will pay 15%. What will be the value of the retirement account if you plan to retire in 40 years? (Assume the retirement account has a zero balance currently)

A

$8,895,451.54

72
Q

Suppose you were planning on investing in a product that would pay you $20,000 in each of the next 4 years. If the appropriate discount rate is 11.5%, what should the price of the product be today?

A

$61,392.28

73
Q

(Compound interest) What will be the FV of the following investment? (end mode)

Initial investment of $7,000 for 7 years at 6% compounded semi-annually
A

$10,588.13

74
Q

(Compound interest) What will be the FV of the following investment? (end mode)

Initial investment $55,000 and monthly payments of $50 for 20 years at 9% compounded monthly
A

$363,897.68

75
Q

(Solve for PMT ) How much do you need to invest per compounding period to reach $1,000,000 in the following scenarios (end mode)?

45 years at 12% compounded semi-annually
A

$318.36

76
Q

(Solve for PMT ) How much do you need to invest per compounding period to reach $1,000,000 in the following scenarios (end mode)?

35 years at 9% compounded monthly
A

$339.93

77
Q

(Solve for PMT ) How much do you need to invest per compounding period to reach $1,000,000 in the following scenarios (end mode)?

25 years at 10% compounded annually
A

$10,168.07

78
Q

(Solve for PMT ) How much do you need to invest per compounding period to reach $1,000,000 in the following scenarios (end mode)?

15 years at 15% compounded monthly
A

$1495.87

79
Q

(Compound value solving for n) How many years will it take to get the following (round your answer to the nearest year):

$100,000 to become $1,000,000 at  7% compounded annually
A

34 years

80
Q

(Compound value solving for n) How many years will it take to get the following (round your answer to the nearest year):

$38,000 to become $2,000,000 at 9% compounded semi-annually
A

45 years

Finance 201 (18 decks)

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