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TVM ChallengingRatings:

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https://www.scribd.com/doc/30301669/TVM-Challenging

10/27/2014

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Time Value of Money Problems (Dr. A. Tezel)

Formulas:PV=FV

t

[ 1/(1+R)

t

]Present Value of Annuity: PV = C [ 1/R – 1/(R(1+R)

N

) ]Growing Annuity PV = [ C / (R – g) ][ 1 – ((1+g)/(1+R))

N

]Future Value of Annuity: FV = [(1+R)

N

– 1 ] /R

Which amount is worth more at 14%, compounded annually; $1,000 in hand today or $2,000 due in 6 years?2000(1/1.14)^6=2000(0.4556)=911.20. 1000 today is worth more.

How would you find the compound annual return from a stock whose price rose from $10to $25 over 5 years? (Assume the stock paid no dividends)25=10(1+R)^5 2.5=(1+R)^5 2.5^(1/5) – 1= R R=20.11%

Find the amount to which $500 will grow under each of the following conditions:12 % compounded annually for 5 years12% compounded semiannually for 5 years12% compounded quarterly for 5 years12% compounded monthly for 5 years881.15, 895.40, 903.05, and 908.35

A 20-year ordinary annuity pays an annual payment of 12,000. What is this annuity’s present value for a 9 percent interest rate?PV=12000(PVIFA(9%,20 years) = 109,543

In the previous question, each annual payment is 4 percent larger than the previous one.Find the present value of this growing annuity?PV=12000/(0.9-0.04) [1- (1.04/1.09)^20] = 240000 {1-0.39096] = 146,168

Your car loan is for 10,000 to be paid over 5 years. If the interest rate is 12% per year,what are your monthly payments?10000= PMT(PVIFA(1%,60 yrs) PMT = 10000/ PVIFA = 222.44

What is the price of a bond with a 10 percent yield to maturity if the coupon payments are$40 every six months and the bond matures in 5 years?Price = 40 PVIFA (5%, 10 periods) + 1000 PVIF (5%, 10 yrs) = 308.87 + 613.91 = 922.781

While you were a student in college, you borrowed $12,000 in student loans at an interestrate of 9% per year, compounded annually. If you repay $1,500 per year, how long to thenearest year, will it take you to repay the loan?12000 = 1500 PVIFA (9%, N) 8=PVIFA(9%,N) N=6.29 years

You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year,with the first payment being made a year from today, in a bank account which pays 12 %interest, compounded annually. Your last deposit will be less than $1,250 if less is neededto round out to $10,000. How many years will it take you to reach your $10,000 goal,and how large will the last deposit be? N=5.94 years. After 5 years, 1250(6.3528) = 7,9417941(1.12) = 8893.92 and 10000 - 8893.92=1106.92Can you suggest another method for solving this problem?

Your client is 40 years old and wants to begin saving for retirement. You advise the clientto put $5,000 a year into the stock market. You estimate that the market’s return will beon average of 12% a year. Assume the investment will be made at the end of the year.How much money will she have by age 65? By age 70?FV= 5000 FVIFA(12%, 25 years) = 666,669FV= 5000 FVIFA(12%, 30 years) = 1,206,663

You just started your first job, and you want to buy a house within 3 years. You arecurrently saving for the down payment. You plan to save $5,000 the first year. You alsoanticipate that the amount you save each year will rise by 10 percent a year as your salaryincreases over time. Interest rates are assumed to be 7 percent, and all savings occur atyear end. How much money will you have for a down payment in 3 years?5000(0.07-0.10) [1-(1.1/1.07)^3 ] =14,415.41 14415.41(1.07)^3 =17,659.50

A father is planning a savings program to put his daughter through college. His daughter is now 13 years old. She plans to enroll at the university in 5 years, and it should take her 4 years to complete her education. Currently, the cost per year is $12,500, but a 5%annual inflation rate in the cost is expected. The daughter recently received $7,500 fromher grandfather’s estate; this money, which is invested in a bank account paying 8%interest, compounded annually, will be used to help meet the costs of the daughter’seducation. The rest of the costs will be met by money the father deposits in the savingsaccount. He will make 6 equal deposits to the account, one deposit in each year from noeuntil his daughter starts college. These deposits will begin today and will also earn 8 %on interest, compounded annually. How large must each deposit to be for him to be ableto put his daughter through college?131415161718192021-15954 -16751 -17589 -184682

PV of these payments at age 18 is 61,203 minus 7500(1.09)^5 =61203-11,020=50,18350183= PMT FVIFA(8%,6 yrs) PMT=6,841

You are 65 years old and are considering whether it pays to buy an annuity from aninsurance company. For a cost of $10,000 the insurance company will pay you $1,000 per year for the rest of your life. If you can earn 8% per year on your money in a bank account and expect to live until age 80, is it worth buying the annuity? What impliedinterest rate is the insurance company paying you? How long must you live for theannuity to be worthwhile?PV=8,559.48. Implied rate=5.56%. If you live 21 years you make 8%.Inflation questions:

At age 20 you save $100 and invest it at a nominal interest rate of 8%. At age 65, youwill have $3,192. Given the expected inflation is 5% per year over these years, what isthe real future value?Method 1: Find the real rate 1.08/1.05 – 1 = 0.02857100 (1.02857)^45 = $355or Method 2 : 100(1.08)^35 /1.05^45 =3,192 / 8.985 =$355

You plan to buy a car four years from now and want to invest enough money now to payfor it. Your desired model now costs $10,000, and the interest rate you can earn on your money is 8% per year. If inflation in car prices is 5% per year, how much do you have toinvest now?Answer is= $8,934

You take out a three-year $10,000 mortgage with two points at a stated APR of 12% withmonthly payments. What is the true APR on the loan?PMT= 332.14 9800=332.14(PVIFA(R%, 36 mo). R=1.1175% times 12 = 13.41%

You must pay a creditor $6,000 one year from now, $5,000 two years from now, $4,000three years from now, $2,000 four years from now, and a final $1,000 five years fromnow. You would like to restructure the loan into five equal annual payments due at theend of each year. If agreed interest rate is 6% compounded annually, what is your payment?PV = 15,800.28 15800.28 = PMT PVIFA(6%,5 yrs) PMT = $3,7503

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