1. Exploring Finance: Compounding

1. What is the future value of $1 in Period 4 when the interest rate is 5%?

1. $1.00
2. $1.16
3. $1.22
4. $1.63

-Select-abcdItem 1

2. If the interest rate were 10%, how many periods would it take for the future value to be worth $1.95?

1. 3 periods
2. 5 periods
3. 6 periods
4. 7 periods

-Select-abcdItem 2

3. Consider the future value of $1 in 10 periods when the interest rate is 5%. When the interest rate doubles to 10%, the future value:

1. Increases but by less than double
2. Exactly doubles
3. Increases by more than double
4. Cannot be determined

Exploring Finance: Discounting

1. What is the present value of $1 due in 3 years when the discount interest rate is 10%?

1. $1.33
2. $1.00
3. $0.75
4. $0.10

-Select-abcdItem 1

2. How much is each $1 due in 14 years at a discount rate of 5% worth today?

1. $0.86
2. $0.51
3. $1.98
4. $1.00

-Select-abcdItem 2

3. Bond Long will pay $1 in 20 years with a discount interest rate of 5% and Bond Short will pay $1 in 5 years with a discount interest rate of 10%. Which bond has the higher present value?

1. Long greater than Short
2. Short greater than Long
3. Long and Short have same present value
4. Not enough information to determine

1. Find the present values of the following cash flow streams at a 10% discount rate. Do not round intermediate calculations. Round your answers to the nearest cent.

   0

   1

   2

   3

   4

   5

   Stream A	$0	$100	$350	$350	$350	$300
   Stream B	$0	$300	$350	$350	$350	$100

   Stream A: $

   Stream B: $

2. What are the PVs of the streams at a 0% discount rate? Round your answers to the nearest dollar.

   Stream A: $

   Stream B: $

Your client is 23 years old. She wants to begin saving for retirement, with the first payment to come one year from now. She can save $12,000 per year, and you advise her to invest it in the stock market, which you expect to provide an average return of 7% in the future.

1. If she follows your advice, how much money will she have at 65? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

2. How much will she have at 70? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

3. She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her investments continue to earn the same rate, how much will she be able to withdraw at the end of each year after retirement at each retirement age? Do not round intermediate calculations. Round your answers to the nearest cent.

   Annual withdrawals if she retires at 65: $

   Annual withdrawals if she retires at 70: $

A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 9%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

1

2

3

4

Contract 1	$3,500,000	$3,500,000	$3,500,000	$3,500,000
Contract 2	$2,500,000	$3,000,000	$4,000,000	$5,500,000
Contract 3	$6,500,000	$1,500,000	$1,500,000	$1,500,000

As his adviser, which contract would you recommend that he accept?

Select the correct answer.

a. Contract 3 gives the quarterback the highest present value; therefore, he should accept Contract 3.

b. Contract 1 gives the quarterback the highest present value; therefore, he should accept Contract 1.

c. Contract 1 gives the quarterback the highest future value; therefore, he should accept Contract 1.

d. Contract 3 gives the quarterback the highest future value; therefore, he should accept Contract 3.

e. Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2.

You have saved $4,000 for a down payment on a new car. The largest monthly payment you can afford is $500. The loan will have a 12% APR based on end-of-month payments. What is the most expensive car you can afford if you finance it for 48 months? For 60 months? Do not round intermediate calculations. Round your answers to the nearest cent.

Financed for 48 months: $

Financed for 60 months: $

1. Complete an amortization schedule for a $10,000 loan to be repaid in equal installments at the end of each of the next 3 years. The interest rate is 8% compounded annually. If an amount is zero, enter "0". Do not round intermediate calculations. Round your answers to the nearest cent.

   	Beginning			Repayment	Remaining
   Year	Balance	Payment	Interest	of Principal	Balance
   1	$	$	$	$	$
   2
   3

2. What percentage of the payment represents interest and what percentage represents principal for each of the 3 years? Do not round intermediate calculations. Round your answers to two decimal places.

   	% Interest	% Principal
   Year 1:	%	%
   Year 2:	%	%
   Year 3:	%	%

   Why do these percentages change over time?

   1. These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the remaining or outstanding balance declines.
   2. These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the remaining or outstanding balance declines.
   3. These percentages change over time because even though the total payment is constant the amount of interest paid each year is declining as the remaining or outstanding balance increases.
   4. These percentages change over time because even though the total payment is constant the amount of interest paid each year is increasing as the remaining or outstanding balance increases.
   5. These percentages do not change over time; interest and principal are each a constant percentage of the total payment.
   -Select-IIIIIIIVV