Name:

Real Estate Investments/Analysis

Spring 2009
Professor Harrison
Quiz #1 -- Time Value of Money Review
The following problems are designed to provide a review of many of the basic calculations you
learned to perform in your previous finance curriculum which will come in useful/necessary
throughout this semester. If you are unable to accurately answer these questions, please review
these concepts immediately. Good-luck!
1. Which amount is worth more at 8.50% compounded annually: $1,000 in hand
today or $2,000 due in 8 years?

2. What is the present value of a perpetuity of $1,500 per year if the appropriate
discount rate is 7.25%?

the

3. Your company is planning to borrow $100,000 on a 7-year, 11.00%, annual

payment, fully amortized term loan. What fraction of the payment made at
end of the third year will represent repayment of principal?

4. As manager of Gotham Jewelry, you want to sell on credit, giving customers 3

months in which to pay. However, you will have to borrow from the bank
to
carry the accounts payable. The bank will charge a nominal 14 percent, but
with
monthly compounding. You want to quote a nominal rate to your
customers (all
of whom are expected to pay on time) which will exactly cover
your financing
costs. What nominal annual rate should you quote to your
customers?
5. To the closest year, how long will it take $35,000 to double if it is deposited and
earns 6.25% compounded annually?

6. What is the present value of $75,000 to be received 10 years from today if the
interest rate is 7.35% compounded continuously?

7. What is the future value, in 25 years, of a $1,000 deposit invested at 9.50%,

compounded continuously?

from

8. Suppose your Professor currently has no savings, but wants to retire in 30 years as
a millionaire. If he can earn 8.75%, compounded annually on his investments,
how much should he set aside in equal installments (beginning one year
today) to reach his goal?

9. Lawson Lawn and Garden invests $5 million to clear a tract of land and to set out
some young pine trees. The trees will mature in 10 years, at which time
Lawson
plans to sell the forest at an expected price of $15.5 million. What
is Lawson's
expected rate of return?

you
save no

10. You are planning to retire in 38 years. You currently have $25,000, and would
like to have $5 million when you retire. What annual rate of interest would
have to receive on your money in order to reach your goal, assuming you
more money?

Year 1,
$500?

end of
and

11. What is the present value of a cash flow stream, given an interest rate of 7.85%,
compounded annually, which offers the following end of year payments:
$100; Year 2, $200; Year 3, $300; Year 4, $400; and Year 5,

12. What is the future value (at the end of year 5) of a cash flow stream, given an
interest rate of 7.85%, compounded annually, which offers the following
year payments: Year 1, $100; Year 2, $200; Year 3, $300; Year 4, $400;
Year 5, $500?

13. What is the effective annual rate on a security offering a 12.25% nominal rate,
compounded monthly?

14. What is the stated (nominal) annual rate on a loan which charges an effective rate
of 16.65%, with interest compounded quarterly?

15. First City Savings pays 7.5% interest, compounded annually. Second City
Savings pays 7.35% interest, compounded quarterly. Based on effective, or
equivalent, interest rates, in which bank would you prefer to deposit your
money?

at the
the

16. A 15-year security has a price of $340.4689. The security pays $50 at the end of
each of the next 5 years, and then it pays a different fixed cash flow amount
end of each of the following 10 years. Interest rates are 8.00%. What is
annual cash flow amount between years 6 and 15?

sign a
loan.

17. Suppose you borrow $15,000 to purchase a new car. You take advantage of the
manufacturer's special financing offer, and obtain a loan rate of 4.9%. You
note requiring you to make 60 equal monthly payments to fully repay the
How much is each monthly payment?

Year 1,
$100?

18. What is the present value of a cash flow stream, given an interest rate of 6.75%,
compounded annually, which offers the following end of year payments:
$500; Year 2, $400; Year 3, $300; Year 4, $200; and Year 5,

end of
and

19. What is the future value (at the end of year 5) of a cash flow stream, given an
interest rate of 6.75%, compounded annually, which offers the following
year payments: Year 1, $500; Year 2, $400; Year 3, $300; Year 4, $200;
Year 5, $100?

20. Consider an investor with a 3 asset portfolio. 25% of the investors portfolio is
invested in AT&T stock with an expected return of 14%, an additional 25%
of the
investors portfolio is invested in Kelloggs Corporation stock with an expected
return of 13%, while the remaining 50% of the portfolio is invested in IBM
stock
with an expected return of 12%. The standard deviation of expected
returns for
the three individual assets is 25%, 15%, and 10% respectively. The
correlation
coefficent between the AT&T and Kelloggs stock returns is 0.40,
the correlation
coefficient between the Kelloggs and IBM stock returns is
0.50, and the
correlation coefficient between the AT&T and IBM stock
returns is 0.60. What is
the standard deviation of expected return for this portfolio?

Answers
1. $2,000 in 8 years
2. $20,689.66
3. 59.35%
4. 14.16%
5. 11 years
6. $35,962.91
7. $10,751.01
8. $7,685.90
9. 11.98%
10. 14.96%
11. $1,142.13
12. $1,666.54
13. 12.96%
14. 15.70%
15. Second City Savings
16. $30.84
17. $282.38
18. $1,292.16
19. $1,791.25
20. 12.41%