Midterm Exam 2 Pt. 2 Flashcards
What is a TIP
Treasury inflation protected security
How does a TIP work?
They protect investors against inflation, I’m not sure how
What is another name for the Term Structure of Interest rates?
Yield Curve
True or False: The greater the time to maturity, the greater the risk
True
What is the perpetuity formula?
PV = PMT/i
What is the purpose of learning TVM?
Being able to evaluate cash flows over time in order to make better decisions.
What does time value of money mean?
The value of money changes as time passes.
What factors make it better to receive money NOW instead of in the future?
Risk
Opportunity (you could use it to invest now)
Inflation
Define present value
How much spending power money has TODAY
Discount rate equation
Discount rate = risk free rate + risk premium
Compounding
Finding the FV
Discounting
Finding the PV
Other names for the Discount Rate
Cost of capital, required rate of return, interest rate
In order to determine the future value of some lump sum, we must use the process of _________________.
Compounding
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.
Discount
The discount rate consists of the risk free rate plus the risk premium.
True
Would you rather have $100,000 today or $100,000 one year from today?
Rather have $100,000 TODAY
What is the most important thing to remember for the test?
REMEMBER YOUR CONVERSIONS!!! If you switch to semi annual or monthly payments, DOUBLE CHECK YOUR ANSWERS!!!
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?
$94.34
$74.73
Holding all else equal, the more discounting periods of a lump sum received in the future, the ______________ the present value of the lump sum.
Smaller
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?
$83,545
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.
$18,528
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?
$703,998.87
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?
$2,865.43
Holding all else equal, the future value of a lump sum will be ______________ if the interest rate is larger.
Larger
The present value of a lump sum that will be received in the future will be ______________ if the interest rate is larger.
Smaller
Holding all else equal, the future value of a lump sum will be ______________ if the number of time periods is larger.
Larger
Holding all else equal, the future value of a lump sum will be ______________ if the size of the lump sum is increased.
Larger
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?
$1,395,765
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?
$466,114
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.
$73,529
(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
$3869.68
(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
5.81%
(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
2.34%
(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
21.98%
(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
9.16%
(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
34 years
(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
8 years
(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
$26,443.86
(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
$172,616.39
(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
$299,976.86
(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
$289,138.78
(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?
$20,188.03
(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?
$31,183.92
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?
$121,550.63
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.
$105,000
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?
$19,277.17
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?
$5,368,71
What is an annuity?
An equally spaced sequence of cash flows. Think of car loans, mortgage payments, and bonds, etc.
Deferred annuity
An annuity that starts in the future instead of now (like 5 years from now, think of student loan payments)
What is FVIFA
Future value interest factor for an annuity
Future value of annuity equation
FV = PMT x {(1+i)^n - 1 / i}
What is the PV of $1,000 at the end of each of the next 3 years, if the opportunity cost is 8%?
$2577.10
(1000 is the PMT)
Ordinary annuity
There’s only a one period delay between the start of the period and the time of the first payment (using END)
APR
Annual percentage rate
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?
10
APY
Annual percentage yiedl
What is another name for APY?
Effective yield
What is an effective yield
It has non-annual compounding periods
Effective yield equation
Effective yield = (1+ i/m)^m - 1
i = annual interest rate
m = # of compounds per year
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)
20.08 years
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.)
$1,206,663.42
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?
$466.24
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?
$14,281.34
What is the effective yield (as a decimal) on the automobile loans with an annual interest rate of 5% that compounds monthly?
5.12%
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?
$4,405,851
At what discount rate, will the present value of a $10,000 ordinary annuity payment for 5 years be worth $35,000 today?
13.20%
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)
14.80%
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.)
$3,835,457.10
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.)
$2,173,725.73
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)
$8,895,451.54
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?
$61,392.28
(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
$10,588.13
(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
$363,897.68
(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
$318.36
(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
$339.93
(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
$10,168.07
(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
$1495.87
(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
34 years
(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
45 years
