Practice Questions: Time Value of Money (TVM)

& Its Applications in Investments

1. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? a.$591.09

b.$622.20

c.$654.95

d.$689.42

e.$723.89

N6

I/YR5.5%

PV$500

PMT$0

FV$689.42

2. How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%? a.$1,067.95

b.$1,124.16

c.$1,183.33

d.$1,245.61

e.$1,311.17

N25

I/YR5.5%

PMT$0

FV$5,000

PV$1,311.17

3. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? a.4.37%

b.4.86%

c.5.40%

d.6.00%

e.6.60%

N5

PV$747.25

PMT$0

FV$1,000.00

I/YR6.00%

4. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

Years:01234

|||||

CFs:$0$1,000$2,000$2,000$2,000

a.$5,987

b.$6,286

c.$6,600

d.$6,930

e.$7,277

I/YR = 6.0%

01234

CFs:$0$1,000$2,000$2,000$2,000

PV of CFs:$0$943$1,780$1,679$1,584

PV = $5,987Found using the Excel NPV function.

PV = $5,987Found by summing individual PVs.

PV = $5,987Found using the calculator NPV key.

5. At a rate of 6.5%, what is the future value of the following cash flow stream?

Years:01234

|||||

CFs:$0$75$225$0$300

a.$526.01

b.$553.69

c.$582.83

d.$613.51

e.$645.80

I/YR = 6.5%

01234

CFs:$0$75$225$0$300

FV of CFs:$0$91$255$0$300

FV = $645.80Found by summing individual FVs.

FV = $645.80Found with the NFV key in some calculators. FV = $645.80Found with a calculator by first finding the PV of the stream, then finding the FV of that PV.

PV of the stream:$501.99

FV of the PV:$645.80

6. What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually? a.$1,819

b.$1,915

c.$2,016

d.$2,117

e.$2,223

Years5

Periods/Yr2

Nom. I/YR6.0%

N = Periods10

PMT$0

I = I/Period3.0%

PV = $1,500 Could be found using a calculator, an equation, or Excel. FV = $2,016 Note that we must first convert to periods and rate per period

7. An investor plans to buy a common stock and hold it for two years. The investor expects to receive $1.5 in dividend a year and $26 from the sales of the stock at the end of year 2. If the investor wants a 15% return (compound annually), the maximum price the investor should pay for the stock today is roughly: A).$24

B).$28

C).$22

D).$32

E).$26

C).$22 (n=2, pmt = 1.5, fv = 26, I = 15%, PV = ?)

8. Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price? a.$903.04

b.$925.62

c.$948.76

d.$972.48

e.$996.79

N8

I/YR8.2%

PMT$65

FV$1,000

PV$903.04

9. Sadik Inc.'s bonds currently sell for $1,180 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)? a.6.63%

b.6.98%

c.7.35%

d.7.74%

e.8.12%

N5

PV$1,180

PMT$105

FV$1,100

I/YR = YTC7.74%

10. Assume that you are considering the purchase of a...