2) The present value of a $100 perpetuity discounted at 5% is $5,000.
3) You won the lottery and can receive either (1) $60,000 today, or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today. You plan to use the money to pay for your child’s college education in 15 years. You should A) take the $60,000 today because of the time value of money regardless of current interest rates. B) take option two because you get $70,000 rather than $60,000 regardless of current interest rates. C) take the $60,000 today only if the current interest rate is at least 16.67% D) take the $60,000 today if you can earn 6.81% per year or more on your investments
4) You have a savings bond that will be worth $750 when it matures in 3 years, but you need cash today. If the current going rate of interest is 5%, what is your bond worth if you sell it today (rounded to the nearest dollar)? A) $675 B) $648 C) $625 D) $612
5) A bond maturing in 10 years pays $80 each year (including year 10) and $1,000 upon maturity. Assuming 10 percent to be the appropriate discount rate, the present value of the bond is A) $877.11. B) $1,000.00. C) $416.39. D) $1,785.67.
6) You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment? A) 0.055 B) 0.010 C) 0.110 D) 0.220
7) What is the value on 1/1/13 of the following cash flows: Date Cash Received Amount of Cash 1/1/14 $14,000 1/1/15 $20,000 1/1/16 $30,000 1/1/17 $43,000 1/1/18 $57,000 Use a 7% discount rate, and round your answer to the nearest $10. A) $153,270 B) $128,490 C) $112,350 D) $107,330
8) A bond matures in 20 years, at which time it pays the owner $1,000. It also pays $70 at the end of each of the next 20 years. If similar bonds are currently yielding 7%, what is the market value of the bond? A) over $1,000 B) under $1,000 C) exactly $1,000 D) cannot be determined from the information given
9) An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%? A) $735 B) $864 C) $885 D) $900
10) You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?
Year End of Year Deposit 1 $350 2 $500 3 $725 4 $400 A) $1,622 B) $2,207 C) $2,384 D) $2,687
11) You invest $1,000 at a variable rate of interest. Initially the rate is 4% compounded annually for the first year, and the rate increases one-half of one percent annually for five years (year two’s rate is 4.5%, year three’s rate is 5.0%, etc.). How much will you have in the account after five years? A) $1,276 B) $1,359 C) $1,462 D) $1,338
12) An investment will pay $500 in three years, $700 in five years and $1000 in nine years. If your opportunity rate is 6%, what is the present value of this investment?
13) What is the present value of the following perpetuities? a. $200 per year discounted at 6% annually b. $500 per year discounted at 9% annually c. $1,000 per year discounted at 5% annually d. $550 per year discounted at 8% annually