1.

You will receive an inheritance of$500,000in 20 years on your 40th birthday. What is the value of the inheritance today if the discount rate is10\%10%?

1

74,321.81

500,000

50,000

3,363,749

2.

What is the present value (i.e., price) today of a bond that will pay its owner$1,000,000five years from today if the discount rate is4%per annum?

(This is called a zero-coupon or pure discount bond)

1

40,000

1,000,000

1,216,652.90

821,927.11

3.

Imagine that you deposit$6,000a year, starting one year from today, for four years into a savings account paying6%per annum.

(That is one deposit of$6,000per year.)

How much money will you have immediately after you make your fourth and final deposit?

1

27,822.56

30,299.44

26,247.70

24,000

4.

Imagine that your goal is to retire 34 years from today with$1,000,000in savings. Assuming that you currently (i.e., today) have$5,000in savings, what rate of return must you earn on that savings to hit your goal?

(Hint: Solve your future value formula for the discount rate,R)

1

4.8824

0.1686

0.2000

0.4882

5.

Assume that a bond makes 30 equal annual payments of$1,000starting one year from today. (This security is sometimes referred to as an amortizing bond.)

If the discount rate is3.5%per annum, what is the current price of the bond?

(Hint: Recognize that this cash flow stream is an annuity and that the price of an asset is the present value of its future cash flows.)

1

356.27

2,856.79

18,329.05

2806.79

6.

Assume that a bond makes 10 equal annual payments of$1,000starting one year from today. The bond will make an additional payment of$100,000at the end of the last year, year 10. (This security is sometimes referred to as a coupon bond.)

If the discount rate is3.5%per annum, what is the current price of the bond?

(Hint: Recognize that this bond can be viewed as two cash flow streams: (1) a 10-year annuity with annual payments of$1,000, and (2) a single cash flow of$100,000arriving 10 years from today. Apply the tools you've learned to value both cash flow streams separately and then add.)

1

79,208.485

89,283.93

70,891.88

8,316.605

7.

Your daughter will start college one year from today, at which time the first tuition payment of$58,000must be made. Assuming that tuition does not increase over time and that your daughter remains in school for four years, how much money do you need today in your savings account, earning5%per annum, in order to make the tuition payments over the next four years?

1

290,000

1,657,142.85

70,499.36

205,665.13

8.

Imagine that the government decided to fund its current deficit of$431billion dollars by issuing a perpetuity offering a4%annual return. How much would the government have to pay bondholders each year in perpetuity?

(Hint: The$431billion is just the present value of these cash flows at a discount rate of4%.)

1

17.24Billion Dollars

448.24Billion Dollars

10.78Billion Dollars

107.75Billion Dollars

9.

A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can borrow money by drawing down on the line of credit. But, because the borrowed money is for the purpose of your home, the interest is tax-deductible meaning that you can deduct the interest paid on this money from your income to reduce your taxes. If the current annual interest rate on a HELOC is3.85%and your tax rate is32%, what is the after-tax interest rate you will pay on any borrowings under the HELOC?

1

0.026

0.120

0.012

0.308

10.

Your daughter will start college one year from today, at which time the first tuition payment of$58,000must be made. Assume that tuition does not increase over time and that your daughter remains in school for four years. How much money do you need today in your savings account, earning5%per annum, in order to make the tuition payments over the next four years, provided that you have to pay35%per annum in taxes on any earnings (e.g., interest on the savings)?

1

205,665.13

115,822.98

214,309.02

1,784,615.38