Reading 2 - The Time Value of Money in Finance

An annuity will pay eight annual payments of $100, with the first payment to be received one year from now. If the interest rate is 12% per year, what is the present value of this annuity?

• $496.76.

• $1,229.97.

• $556.38.

A 15-year zero-coupon German government bond has an annualized yield of –1.5%. Assuming annual compounding, the price of the bond per €100 of principal is closest to:

• €125.

• €115.

• €105.

An investor purchases a stock on January 1. The annual dividend payments for a stock investment for the next four years, beginning on December 31, are $50, $75, $100, and $125. Based on the cash flow additivity principle, the present value of this series of cash flows will be equivalent to the present value of a $50 annuity and the present value of what series of cash flows?

• $0, $0, $125, and $125.

• $75, $50, $25, and $0.

• $0, $25, $50, and $75.

Wortel Industries has preferred stock outstanding that paying an annual dividend of $3.75 per share. If an investor wants to earn a rate of return of 8.5%, how much should he be willing to pay for a share of Wortel preferred stock?

• $31.88.

• $44.12.

• $42.10.

A bond pays annual coupon interest of £40 and returns its face value of £1,000 in five years. The bond's yield to maturity is 4.5%. Its price today is closest to:

• £946.

• £978.

• £957.

An investor purchases a 10-year, $1,000 par value bond that pays annual coupons of $100. If the market rate of interest is 12%, what is the current market value of the bond?

• $950.

• $887.

• $1,124.

Assuming a constant rate of growth in dividends, we can estimate an equity share's:

• dividend yield as the sum of its required rate of return and its growth rate.

• growth rate as the sum of its dividend yield and its required rate of return.

• required rate of return as the sum of its dividend yield and growth rate.

A financial advisor recommends to her client that he buy a 6-year, $1,000 face value bond that pays annual interest of 5%. The yield to maturity is 4.5%, and the client intends to hold the bond as an investment until it matures. The value of the bond today is closest to:

• $1,000.

• $975.

• $1,025.

An investor makes 48 monthly payments of $500 each beginning today into an account that will have a value of $29,000 at the end of four years. The stated annual interest rate is closest to:

• 10.00%.

• 9.00%.

• 9.50%.

A perpetual bond with a face value of $100,000 pays annual interest of 5%. The bond is quoted at a yield of 7%. The bond's price is closest to:

• $140,000.

• $71,500.

• $98,100.