Week 4 practice questions – Time Value of Money II

Multiple choice questions (2 marks each)

1. How much can be accumulated for retirement (to the nearest $) if $1,000 is
deposited annually, beginning 1 year from today, in an account that earns
10% interest (compounded annually) for 30 years?
A. $9,427
B. $164,494
C. $264,962
D. $300,000

2. How much would need to be invested today (to the nearest $) into a bank account
paying 15% interest to generate a perpetuity of $5,000 per year beginning
tomorrow?
A. $33,333
B. $37,681
C. $38,333
D. $65,217

3. You wish to open a savings account for your grandchild who has just
turned 12 years old. How much would you need to invest in the account
today (rounded to the nearest $1,000) to allow your grandchild to make an
annual withdrawal of $8,000 per year for the foreseeable future assuming
the first withdrawal takes place on their 16th birthday and the savings
account pays interest of 3%?
A. $244,000
B. $32,000
C. $166,000
D. $267,000

4. You win the lottery and are given a choice of how to receive the prize:
1) Five annual payments of $1m with the first payment being received
tomorrow.
2) A single payment of $4.2m tomorrow.
Assuming you can invest money at 7%, which of the below statements is
correct?
A. The present value of option 1 is higher by $200,000
B. The present value of option 1 is higher by $187,200
C. The present value of option 2 is higher by $800,000
D. The present value of option 2 is higher by $187,200
5. You have recently become a parent for the first time and have decided to
invest some money into a fund today to cover the costs of when your child
goes to university. You want to ensure they are able to withdraw $15,000
per year for a three year period. Assuming the first withdrawal will take
place in 18 years’ time and that the fund will provide a return of 5% per
year, how much would you need to invest to the nearest $100?
A. $17,800
B. $17,000
C. $40,848
D. $36,000

6. To the nearest $, how much interest would be accumulated during one year
on $5,000 deposited into an account paying weekly compounded interest at
an APR of 26%?
A. $1,300
B. $67,600
C. $1,480
D. $100

7. What APR is being earned on a deposit of $5,000 made 10 years ago if the
deposit is worth $9,948.94 today? The deposit pays interest semi-annually.
A. 3.56%
B. 6.76%
C. 7.00%
D. 7.12%

8. You have been offered a bank loan with the following terms:
Loan amount $ 30,000
Annual interest rate 5%
Loan type Amortizing
Loan duration in years 3
Repayment frequency Annual
First payment 1 years’ time

What will be the annual repayment on the loan (rounded to the nearest $)?
A. $11,016
B. $10,000
C. $25,915
D. $11,250
Short-answer question

a) If the nominal rate of interest is 5% and the general rate of inflation is 2%,
calculate the real rate of interest.
(1 marks)

b) Explain what it means if an investor is getting a ‘negative return in real terms’.

Provide some calculations to illustrate how this could occur.
(4 marks)

You are buying your first house and have been offered a mortgage with the
following terms:
Mortgage amount $ 220,000
APR 1.2%
Loan type Amortizing
Loan duration in years 20
Repayment frequency Monthly
First payment 1 months’ time

c) Calculate the following:

i) The monthly mortgage repayment.

ii) The total amount of dollar repayments to be made over the duration of the
mortgage.

iii) The total interest in dollars to be paid over the duration of the mortgage.

(5 marks)

Total for the question 10 marks