M&a Practice Question

m&
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 N 6 I/YR 5.5% 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

N 25 I/YR 5.5% 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%

N 5 PV $747.25 PMT $0 FV $1,000.00 I/YR 6.00%

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: 0 1 2 3 4 | | | | | 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%

0 1 2 3 4 CFs: $0 $1,000 $2,000 $2,000 $2,000 PV of CFs: $0 $943 $1,780 $1,679 $1,584

PV = $5,987 Found using the Excel NPV function. PV = $5,987 Found by summing individual PVs. PV = $5,987 Found using the calculator NPV key.

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

Years: 0 1 2 3 4 | | | | | 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%

0 1 2 3 4 CFs: $0 $75 $225 $0 $300 FV of CFs: $0 $91 $255 $0 $300