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Exam 28: Time Value of Money

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Question 91

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Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

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Question 92

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Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

A) Exactly 8% of the first monthly payment represents interest.
B) The monthly payments will decline over time.
C) A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.
D) The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.
E) The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

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Question 93

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When a loan is amortized,a relatively high percentage of the payment goes to reduce the outstanding principal in the early years,and the principal repayment's percentage declines in the loan's later years.

A "growing annuity" is any cash flow stream that grows over time.

Julian and Jonathan are twin brothers (and so were born on the same day) .Today,both turned 25.Their grandfather began putting $2,500 per year into a trust fund for Julian on his 20th birthday,and he just made a 6th payment into the fund.The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Julian's 65th birthday.The grandfather set things up this way because he wants Julian to work,not be a "trust fund baby," but he also wants to ensure that Julian is provided for in his old age. Until now,the grandfather has been disappointed with Jonathan and so has not given him anything.However,they recently reconciled,and the grandfather decided to make an equivalent provision for Jonathan.He will make the first payment to a trust for Jonathan today,and he has instructed his trustee to make 40 additional equal annual payments until Jonathan turns 65,when the 41st and final payment will be made.If both trusts earn an annual return of 8%,how much must the grandfather put into Jonathan's trust today and each subsequent year to enable him to have the same retirement nest egg as Julian after the last payment is made on their 65th birthday?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

What is the present value of the following cash flow stream at a rate of 6.25%?

You have $5,000 invested in a bank that pays 3.8% annually.How long will it take for your funds to triple?