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Most of us intuitively understand that a dollar required today does not have the same value as a dollar needed (or utilized) in the future

1. Using only.gov Websites report the current GDP, the current Federal deficit, the current Federal debt, the bottom line of the current (last) budget approved by Congress (surplus or shortage). Note that the fiscal year for the federal government is October 1 – September 31.

What inference can you draw from the numbers collected?

 

2. Most of us intuitively understand that a dollar required today does not have the same value as a dollar needed (or utilized) in the future. This is due to several factors including interest rates, compounding factors, discounting factors and financial risk. Compare the total payback for a $100,000, 5%, 15 year mortgage and a $100,000, 5%, 30 year mortgage. Suggest a reason for the difference.

Give an example of how your newly acquired knowledge of Time Value of Money (TVM) calculations could better prepare you for the next negotiation or big-ticket purchase in your life.

 

3. Most states have turned to the lottery to raise money for education and other state financing needs. Determine the largest payout for the state in which you reside. Explain the options for receiving the money and select the method you would choose. Provide a reason for your decision using the principle of the time value of money.

 

4. Determine the present values if $5,000 is received in the future (i.e., at the end of each indicated time period) in each of the follow- ing situations:

 

a.5 percent for ten years     b.7 percent for seven years    c.9 percent for four years

 

5. Assume you are planning to invest $5,000 each year for six years and will earn 10 percent per year. Determine the future value of this annuity if your first $5,000 is invested at the end of the first year.

 

6. Determine the present value now of an investment of $3,000 made one year from now and an additional $3,000 made two years from now if the annual discount rate is 4 percent.

 

7. What is the present value of a loan that calls for the payment of $500 per year for six years if the discount rate is 10 percent and the first payment will be made one year from now? How would your answer change if the $500 per year occurred for ten years?

 

8. Determine the annual payment on a $500,000, 12 percent busi- ness loan from a commercial bank that is to be amortized over a five-year period.

 

 

9. Determine the annual payment on a $15,000 loan that is to be amortized over a four-year period and carries a 10 percent interest rate. Also prepare a loan amortization schedule for this loan

 

10. Assume a bank loan requires an interest payment of $85 per year and a principal payment of $1,000 at the end of the loan’s eight-year life.

a.How much could this loan be sold for to another bank if loans of similar quality carried an 8.5 percent interest rate? That is, what would be the present value of this loan?

b.Now, if interest rates on other similar quality loans are 10 percent, what would be the present value of this loan?

c.What would be the present value of the loan if the interest rate is 8 percent on similar-quality loans?

 

11. What is the “interest rate,” and how is it determined?

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