This paper explores time Value of Money. Suppose a State of North Carolina bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.8%, how much is the bond worth today?

Time Value of Money.

Chapter 4 – Time Value of Money 1. Suppose a State of North Carolina bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.8%, how much is the bond worth today? 2. Your bank offers a savings account that pays 3.0% interest, compounded annually. How much will $100 invested today be worth at the end of 25 years? 3. You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond? 4. Your bank pays 3% interest annually.

Time Value of Money.

You have $2,500 invested in the bank. How long will it take for your funds to double? If you invest your money in stocks through a brokerage account and earn 8% annually, how long will it take for your funds to double? 5. An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $36,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 6.5%. How much would it cost him to buy such an annuity today? (Hint: this is an ordinary annuity or annuity due?)

6. You want to open a sushi bar 5 years from now, and you plan to save $5,000 per year, beginning immediately.

Time Value of Money.

You will make 5 deposits in an account that pays 6.0% interest. Under these assumptions, how much will you have 5 years from today? (Hint: this is an ordinary annuity or annuity due?) 7. What’s the present value of $1,000 discounted back 2 years if the appropriate interest rate is 10%, compounded annually? What is the PV if compounded semiannually? What is the PV if compounded quarterly? What is the PV if compounded monthly? What is the PV if compounded daily? 8. The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment.

Time Value of Money.

The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan? (Hint: find the periodic interest rate first, i.e. monthly interest rate, then find the nominal interest rate.) 9. The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the beginning of each month for 3 years.

Time Value of Money.

What nominal annual interest rate is built into the monthly payment plan? (Hint: find the periodic interest rate first, i.e. monthly interest rate, then find the nominal interest rate.) 10. What is the present value of the following cash flow stream at a rate of 8.0%? 11. On January 1, 2016, your sister’s pet supplies business obtained a 10-year amortized mortgage loan for $80,000 at a nominal annual rate of 7.0%, with 120 end-of-month payments.

Set up an amortization schedule that shows the monthly payments and the amount of each payment that repays the principal and the amount that constitutes interest expense to the borrower and interest income to the lender.

Time Value of Money.

The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2016? Instructions: · All problems must be finished in Microsoft Excel by using financial functions, such as “PV”, “FV”, “RATE”, “NPER”, “PMT”, “NPV”, etc., to do the calculations. Avoid directly keying in numbers. https://youtu.be/cy4PiY5ERTI

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