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Time Value of Money: Discussion Questions
Time Value of Money: Discussion Questions
Chapter 9
Time Value of Money
Discussion Questions
9-1. How is the future value (Appeni! A" relate to the present value of a sin#le
sum (Appeni! $"%
The future value represents the expected worth of a sin#le amount& whereas the
present value represents the 'urrent worth.
(V ) *V (1 + I"
n
future value
( )
lue *resent va
1
1
(V *V
+
=
n
i
9-,. How is the present value of a sin#le sum (Appeni! $" relate to the present
value of an annuity (Appeni! -"%
The present value of a sin#le amount is the is'ounte value for one future
payment& whereas the present value of an annuity represents the is'ounte
value of a series of 'onse'utive future payments of e.ual amount.
9-/. 0hy oes money have a time value%
Money has a time value 1e'ause funs re'eive toay 'an 1e investe to rea'h a
#reater value in the future. A person woul rather re'eive 21 toay than 21 in
ten years& 1e'ause a ollar re'eive toay& investe at 3 per'ent& is worth 21.491
after ten years.
9-5. -oes inflation have anythin# to o with ma6in# a ollar toay worth more than
a ollar tomorrow%
7nflation ma6es a ollar toay worth more than a ollar in the future. $e'ause
inflation tens to eroe the pur'hasin# power of money& funs re'eive toay
will 1e worth more than the same amount re'eive in the future.
9-1
Chapter 09: Time Value of Money
9-8. A9ust the annual formula for a future value of a sin#le amount at 1, per'ent
for 10 years to a semiannual 'ompounin# formula. 0hat are the interest
fa'tors ((V7(" 1efore an after% 0hy are they ifferent%
( )
:emiannual /.,04 ,0 n 3;& i
Annual 103 . / 10 n ;& 1, i
A Appeni! (V *V (V
7(
= =
= =
=
The more fre.uent 'ompounin# uner the semiannual 'ompounin#
assumption in'reases the future value so that semiannual 'ompounin# is worth
.101 more per ollar.
9-3. 7f& as an investor& you ha a 'hoi'e of aily& monthly& or .uarterly 'ompounin#&
whi'h woul you 'hoose% 0hy%
The #reater the num1er of 'ompounin# perios& the lar#er the future value.
The investor shoul 'hoose aily 'ompounin# over monthly or .uarterly.
9-4. 0hat is a eferre annuity%
A eferre annuity is an annuity in whi'h the e.ual payments will 1e#in at
some future point in time.
9-<. =ist five ifferent finan'ial appli'ations of the time value of money.
-ifferent finan'ial appli'ations of the time value of money:
>.uipment pur'hase or new prou't e'ision&
*resent value of a 'ontra't proviin# future payments&
(uture value of an investment&
?e#ular payment ne'essary to provie a future sum&
?e#ular payment ne'essary to amorti@e a loan&
-etermination of return on an investment&
-etermination of the value of a 1on.
Chapter 9
Problems
1. Future value (!"# Aou invest 2,&800 a year for three years at < per'ent.
a. 0hat is the value of your investment after one year% Multiply 2,&800 B 1.0<.
b. 0hat is the value of your investment after two years% Multiply your answer to part a
1y 1.0<.
9-,
Chapter 09: Time Value of Money
c. 0hat is the value of your investment after three years% Multiply your answer to part b
1y 1.0<. This #ives your final answer.
d. Confirm that your final answer is 'orre't 1y #oin# to Appeni! A (future value of 21"&
an loo6in# up the future value for n ) /& an i ) < per'ent. Multiply this ta1ular
value 1y 2,&800 an 'ompare your answer to the answer in part c. There may 1e a
sli#ht ifferen'e ue to rounin#.
9$%& 'olution(
a. 2,&800 B 1.0< ) 2,&400
1. 2,&400 B 1.0< ) 2,&913
'. 2,&913 B 1.0< ) 2/&159.,<
. Appeni! A (<;& / perios"
(V ) *V B (V
7(
2,&800 B 1.,30 ) 2/&180
,. Present value (!)# 0hat is the present value of:
a. 2<&000 in 10 years at 3 per'ent%
b. 213&000 in 8 years at 1, per'ent%
c. 2,8&000 in 18 years at < per'ent%
9&"& 'olution(
Appeni! $
*V ) (V B *V
7(
a. 2 <&000 B .88< ) 25&535
1. 213&000 B .834 ) 29&04,
'. 2,8&000 B ./18 ) 24&<48
/. Present Value (!)#
a. 0hat is the present value of 2100&000 to 1e re'eive after 50 years with an
1< per'ent is'ount rate%
b. 0oul the present value of the funs in part a 1e enou#h to 1uy a 21,8 'on'ert ti'6et%
9&)& 'olution(
9-/
Chapter 09: Time Value of Money
Appeni! $
*V ) (V B *V
7(
(1<;& 50 perios"
a. 2100&000 B .001 ) 2100
1. CD. Aou only have 2100 in present value.
5. Present Value (!*# Aou will re'eive 25&000 three years from now. The is'ount rate is
10 per'ent.
a. 0hat is the value of your investment two years from now% Multiply 25&000 B .909
(one yearEs is'ount rate at 10 per'ent".
b. 0hat is the value of your investment one year from now% Multiply your answer to
part a 1y .909 (one yearEs is'ount rate at 10 per'ent".
c. 0hat is the value of your investment toay% Multiply your answer to part b 1y .909
(one yearEs is'ount rate at 10 per'ent".
d. Confirm that your answer to part c is 'orre't 1y #oin# to Appeni! $ (present value
of 21" for n ) / an i ) 10;. Multiply this ta1ular value 1y 25&000 an 'ompare your
answer to part c. There may 1e a sli#ht ifferen'e ue to rounin#.
9$*& 'olution(
a. 25&000 B .909 ) 2/&3/3
1. 2/&3/3 B .909 ) 2/&/08.1,
'. 2/&/08.1, B .909 ) 2/&005./8
. Appeni! $ (10;& / perios"
(V ) (V B *V
7(
25&000 B.481 ) 2/&005.00
8. Future value (!"# 7f you invest 21,&000 toay& how mu'h will you have:
a. 7n 3 years at 4 per'ent%
b. 7n 18 years at 1, per'ent%
c. 7n ,8 years at 10 per'ent%
d. 7n ,8 years at 10 per'ent ('ompoune semiannually"%
9$+& 'olution(
Appeni! A
(V ) *V B (V
7(
9-5
Chapter 09: Time Value of Money
a. 21,&000 B 1.801 ) 2 1<&01,
1. 21,&000 B 8.545 ) 2 38&3<<
'. 21,&000 B 10.</8 ) 21/0&0,0
. 21,&000 B 11.534 ) 21/4&305 (8;& 80 perios"
3. Present value (!)# Aour aunt offers you a 'hoi'e of 2,0&000 in 80 years or 258 toay.
7f money is is'ounte at 1/ per'ent& whi'h shoul you 'hoose%
9$,& 'olution(
Appeni! $
*V ) (V B *V
7(
(1/;& 80 perios"
*V ) 2,0&000 B .00, ) 250
Choose 258 toay.
4. Present Value (!)# Aour un'le offers you a 'hoi'e of 2100&000 in 10 years or 258&000
toay. 7f money is is'ounte at < per'ent& whi'h shoul you 'hoose%
9$-& 'olution(
Appeni! $
*V ) (V B *V
7(
(<;& 10 perios"
*V ) 2100&000 B .53/ ) 253&/00
Choose 2100&000 after 10 years.
<. Present Value (!)# 7n *ro1lem 4& if you ha to wait until 1, years to #et the 2100&000&
woul your answer 'han#e% All other fa'tors remain the same.
9$.& 'olution(
Appeni! $
*V ) (V B *V
7(
(<;& 1, perios"
(V ) 2100&000 B ./94 ) 2/9&400
Choose 258&000 toay.
9-8
Chapter 09: Time Value of Money
9. Present Value (!)# Aou are #oin# to re'eive 2,00&000 in 80 years. 0hat is the ifferen'e
in present value 1etween usin# a is'ount rate of 18 per'ent versus 8 per'ent%
9$9& 'olution(
Appeni! $
2,00& 000 2,00& 000
.001 (18;&80" .1<4 (8;&80"
2,00 214& 500
The ifferen'e is 214&,00
214& 500
,00
214& ,00
10. Present Value (!)# How mu'h woul you have to invest toay to re'eive:
a. 21,&000 in 3 years at 1, per'ent%
b. 218&000 in 18 years at < per'ent%
c. 28&000 ea'h year for 10 years at < per'ent%
d. 250&000 ea'h year for 50 years at 8 per'ent%
9$%/& 'olution(
Appeni! $ (a an 1"
*V ) (V B *V
7(
a. 21,&000 B .804 ) 2 3&0<5
1. 218&000 B ./18 ) 2 5&4,8
Appeni! - (' an "
'. 2 8&000 B 3.410 ) 2 //&880
. 250&000 B 14.189 ) 23<3&/30
11. Future value (!"# 7f you invest 2<&000 per perio for the followin# num1er of perios&
how mu'h woul you have%
9-3
Chapter 09: Time Value of Money
a. 4 years at 9 per'ent.
b. 50 years at 11 per'ent.
9$%%& 'olution(
Appeni! C
(V
A
) A B (V
7(A
a. 2<&000 B 9.,0 ) 2 4/&300
1. 2<&000 B 8<1.</ ) 2 5&385&350
1,. Future value (!"# Aou invest a sin#le amount of 21,&000 for 8 years at 10 per'ent. At
the en of 8 years you ta6e the pro'ees an invest them for 1, years at 18 per'ent. How
mu'h will you have after 14 years%
9$%"& 'olution(
Appeni! A
(V ) *V B (V
7(
(8years& 10;"
21,&000 B 1.3,9 ) 219&85<
Appeni! A
(V ) *V B (V
7(
(18;& 1, perios"
219&85< B 8./80 ) 2105&8<,
1/. Present value (!)# Mrs. Crawfor will re'eive 23&800 a year for the ne!t 15 years from
her trust. 7f a < per'ent interest rate is applie& what is the 'urrent value of the future
payments%
9$%)& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(<;& 15 perios"
) 23&800 B <.,55 ) 28/&8<3
15. Present value (!)# Fohn =on#waite will re'eive 2100&000 in 80 years. His friens are
very 9ealous of him. 7f the funs are is'ounte 1a'6 at a rate of 15 per'ent& what is the
present value of his future Gpot of #olH%
9-4
Chapter 09: Time Value of Money
9$%*& 'olution(
Appeni! $
*V ) (V B *V
7(
(15;& 80 perios"
) 2100&000 B .001 ) 2100
18. Present Value (!)# :herwin 0illiams will re'eive 21<&000 a year for the ne!t ,8 years
as a result of a pi'ture he has painte. 7f a is'ount rate of 10 per'ent is applie& shoul he
1e willin# to sell out his future ri#hts now for 2130&000%
9$%+& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(10;& ,8 perios"
*V
A
) 21<&000 B 9.044 ) 213/&/<3
Co& the present value of the annuity is worth more than 2130&000.
13. Present value (!)# Ieneral Mills will re'eive 2,4&800 per year for the ne!t 10 years as a
payment for a weapon he invente. 7f a 1, per'ent rate is applie& shoul he 1e willin# to
sell out his future ri#hts now for 2130&000%
9$%,& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(1,;& 10 perios"
*V
A
) 2,4&800 B 8.380 ) 2188&/48
Aes& the present value of the annuity is worth less than 2130&000.
14. Present value (!)# The 0estern :weepsta6es has 9ust informe you that you have won
21 million. The amount is to 1e pai out at the rate of 280&000 a year for the ne!t ,0 years.
0ith a is'ount rate of 1, per'ent& what is the present value of your winnin#s%
9$%-& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(1,;& ,0 perios"
*V
A
) 280&000 B 4.539 ) 2/4/&580
9-<
Chapter 09: Time Value of Money
1<. Present value (!)# ?ita Ion@ales won the 230 million lottery. :he is to re'eive
21 million a year for the ne!t 80 years plus an aitional lump sum payment of 210 million
after 80 years. The is'ount rate is 10 per'ent. 0hat is the 'urrent value of her winnin#s%
9$%.& 'olution(
Appeni! -
*V
A
) A B *V
7(A
(10;& 80 perios"
*V
A
) 21&000&000 B 9.918 ) 29&918&000
Appeni! $
*V ) (V B *V
7(
(10;& 80 perios"
*V ) 210&000&000 B .009 ) 290&000
2 9&918&000
90&000
210&008&000
19. Future value (!"# $ru'e :utter invests 2,&000 in a mint 'onition Colan ?yan 1ase1all
'ar. He e!pe'ts the 'ar to in'rease in value ,0 per'ent a year for the ne!t five years.
After that& he anti'ipates a 18 per'ent annual in'rease for the ne!t three years. 0hat is the
pro9e'te value of the 'ar after ei#ht years%
9$%9& 'olution(
Appeni! A
(V ) *V B (V
7(
(,0;& 8 perios"
) 2,&000 B ,.5<< ) 25&943
(V ) *V B (V
7(
(18;& / perios"
) 25&943 B 1.8,1 ) 24&83<.80
,0. Future value (!"# Christy ?ee has 1een epositin# 21&800 in her savin#s a''ount every
-e'em1er sin'e ,001. Her a''ount earns 3 per'ent 'ompoune annually. How mu'h will
she have in -e'em1er ,010% (Assume that a eposit is mae in -e'em1er of ,010. Ma6e
sure to 'ount the years 'arefully."
9-9
Chapter 09: Time Value of Money
9$"/& 'olution(
Appeni! C
(V
A
) A B (V
7(A
(3;& n ) 10"
(V
A
) 21&800 B 1/.1<1 ) 219&441.80
,1. Future value (!"# At a #rowth (interest" rate of < per'ent annually& how lon# will it ta6e
for a sum to ou1le% To triple% :ele't the year that is 'losest to the 'orre't answer.
9$"%& 'olution(
Appeni! A
7f the sum is ou1lin#& then the ta1ular value must e.ual ,.
7n Appeni! A& loo6in# own the <; 'olumn& we fin the fa'tor
'losest to , (1.999" on the 9-year row. The fa'tor 'losest to /
(,.9/4" is on the 15-year row.
,,. Present value (!)# 7f you owe 2/0&000 paya1le at the en of five years& what amount
shoul your 'reitor a''ept in payment immeiately if she 'oul earn 11 per'ent on her
money%
9$""& 'olution(
Appeni! $
*V ) (V B *V
7(
(11;& 8 perios"
*V ) 2/0&000 B .89/ ) 214&490
,/. Present value (!)# $arney :mith invests in a sto'6 that will pay iviens of 2/.00 at
the en of the first yearJ 2/./0 at the en of the se'on yearJ an 2/.30 at the en of the
thir year. Also& he 1elieves that at the en of the thir year he will 1e a1le to sell the sto'6
for 280. 0hat is the present value of all future 1enefits if a is'ount rate of 11 per'ent is
applie% (?oun all values to two pla'es to the ri#ht of the e'imal point."
9$")& 'olution(
9-10
Chapter 09: Time Value of Money
Appeni! $
*V ) (V B *V
7(
-is'ount rate ) 11;
2 /.00 B .901 ) 2 ,.40
/./0 B .<1, ) ,.3<
/.30 B .4/1 ) ,.3/
80.00 B .4/1 ) /3 .88
255.83
,5. Present value (!)# Mr. (lint retire as presient of Color Title Company 1ut is 'urrently
on a 'onsultin# 'ontra't for 258&000 per year for the ne!t 10 years.
a. 7f Mr. (lintEs opportunity 'ost (potential return" is 10 per'ent& what is the present
value of his 'onsultin# 'ontra't%
b. Assumin# that Mr. (lint will not retire for two more years an will not start to re'eive
his 10 payments until the en of the thir year& what woul 1e the value of his
eferre annuity%
9&"*& 'olution(
0sin1 a T2o 'tep Procedure
Appeni! -
a. *V
A
) A B *V
7(A
(i ) 10;& 10 perios"
) 258&000 B 3.158 ) 2,43&8,8
Appeni! $
1. *V ) (V B *V
7(
(i ) 10;& , perios"
2,43&8,8 B .<,3 ) 2,,<&510
3lternative 'olution
Appeni! -
a. *V
A
) A B *V
7(A
(10;& 10 perios"
*V
A
) 258&000 B 3.158 ) 2,43&8,8
9-11
Chapter 09: Time Value of Money
1. -eferre annuity-Appeni! -
*V
A
) 258&000 (3.<15 K 1.4/3" where n ) 1,J n ) , an
i ) 10;
) 258&000(8.04<"
) 2,,<&810 (or use a two step solution"
The answer is sli#htly ifferent from the answer a1ove ue to
rounin# in the ta1les.
,8 Quarterly compoundin1 (!+# Cousin $ertha investe 2100&000 10 years a#o at 1,
per'ent& 'ompoune .uarterly. How mu'h has she a''umulate%
9$"+& 'olution(
Appeni! A
(V ) *V B (V
7(
(/;& 50 perios"
(V ) 2100&000 B /.,3, ) 2/,3&,00
,3. 'pecial compoundin1 (!+# -etermine the amount of money in a savin#s a''ount at the
en of five years& #iven an initial eposit of 2/&000 an a < per'ent annual interest rate
when interest is 'ompoune (a" annually& (1" semiannually& an ('" .uarterly.
9$",& 'olution(
Appeni! A
(V ) *V B (V
7(
a. 2/&000 B 1.539 ) 25&504 (n)8J i)<;"
1. 2/&000 B 1.5<0 ) 25&550 (n)10J i)5;"
'. 2/&000 B 1.5<3 ) 25&58< (n),0J i),;"
9-1,
Chapter 09: Time Value of Money
,4. 3nnuity due (!*# As state in the 'hapter& annuity payments are assume to 'ome at the
en of ea'h payment perio (terme an orinary annuity". However& an e!'eption o''urs
when the annuity payments 'ome at the 1e#innin# of ea'h perio (terme an annuity ue".
To fin the present value of an annuity ue& su1tra't 1 from n an a 1 to the ta1ular
value. To fin the future value of an annuity& a 1 to n an su1tra't 1 from the ta1ular
value. (or e!ample& to fin the future value of a 2100 payment at the 1e#innin# of ea'h
perio for five perios at 10 per'ent& #o to Appeni! C for n ) 3 an i ) 10 per'ent. =oo6
up the value of 4.413 an su1tra't 1 from it for an answer of 3.413 or 2341.30 (2100 B
3.413".
0hat is the future value of a 10-year annuity of 2,&000 per perio where payments
'ome at the 1e#innin# of ea'h perio% The interest rate is < per'ent.
9$"-& 'olution(
Appeni! C
(V
A
) A B (V
7(A
n ) 11& i ) <; 13.358 K 1 ) 18.358
(V
A
) 2,&000 B 18.358 ) 2/1&,90
,<. 3nnuity due (!*# ?elate to the is'ussion in pro1lem ,4& what is the present value of
a 10-year annuity of 2/&000 per perio in whi'h payments 'ome at the 1e#innin# of ea'h
perio% The interest rate is 1, per'ent.
9$".& 'olution(
Appeni! -
*V
A
) A B *V
7(A
n ) 9& i ) 1,; 8./,< + 1 ) 3./,<
*V
A
) 2/&000 B 3./,< ) 21<&9<5
,9. Present value alternative (!)# Aour #ranfather has offere you a 'hoi'e of one of the
three followin# alternatives: 28&000 nowJ 21&000 a year for ei#ht yearsJ or 21,&000 at the
en of ei#ht years. Assumin# you 'oul earn 11 per'ent annually& whi'h alternative shoul
you 'hoose% 7f you 'oul earn 1, per'ent annually& woul you still 'hoose the same
alternative%
9$"9& 'olution(
9-1/
Chapter 09: Time Value of Money
(first alternative" *resent value of 28&000 re'eive now:
28&000
(se'on alternative" *resent value of annuity of 21&000 for ei#ht
years: Appeni! -
A 7(A
7(A
*V AB*V
21& 000 *V (11;& <years"
21& 000 8.153
28&153
=
=
=
=
(thir alternative" *resent value of 21,&000 re'eive in ei#ht
years: Appeni! $
7(
7(
*V (VB*V
21,& 000B*V (11;& <years"
21,& 000B.5/5
28& ,0<
=
=
=
=
:ele't 21,&000 to 1e re'eive in ei#ht years.
9$"9& (Continued#
4evised ans2ers based on %"5&
(first alternative" *resent value of 28&000 re'eive toay: 28&000
(se'on alternative" *resent value of annuity of 21&000 at 1,; for
< years: Appeni! -
9-15
Chapter 09: Time Value of Money
A 7(A
7(A
*V A *V
21& 000 *V (1,;& <years"
21& 000 5.93<
25&93<
=
=
=
=
(thir alternative" *resent value of 21,&000 re'eive in < years at
1,;: Appeni! $
7(
7(
*V ) (VB*V
) 21,& 000B*V (1,;& <years"
) 21,& 000B.505
) 25&<5<
:ele't 28&000 now. As the interest rate (is'ount rate" in'reases
the present value e'lines.
/0. Payment re6uired (!*# Aou nee 2,/&983 at the en of nine years& an your only
investment outlet is an 4 per'ent lon#-term 'ertifi'ate of eposit ('ompoune annually".
0ith the 'ertifi'ate of eposit& you ma6e an initial investment at the 1e#innin# of the first
year.
a. 0hat sin#le payment 'oul 1e mae at the 1e#innin# of the first year to a'hieve this
o19e'tive%
b. 0hat amount 'oul you pay at the en of ea'h year annually for nine years to a'hieve
this same o19e'tive%
9$)/& 'olution(
a. Appeni! $
*V) (V B *V
7(
(4;& 9 perios"
*V) 2,/&983 B .855 ) 21/&0/,.03
9-18
Chapter 09: Time Value of Money
1. Appeni! C
A ) (V
A
L(V
7(A
A ) 2,/&983L11.94< ) 2,&000 per year
/1. Quarterly compoundin1 (!+# $everly Hills starte a paper route on Fanuary 1& ,005.
>very three months& she eposits 2/00 in her 1an6 a''ount& whi'h earns < per'ent annually
1ut is 'ompoune .uarterly. Dn -e'em1er /1& ,004& she use the entire 1alan'e in her
1an6 a''ount to invest in an investment at 1, per'ent annually. How mu'h will she have on
-e'em1er /1& ,010%
9$)%& 'olution(
Appeni! C
(V
A
) A B (V
7(A
(,;& 13 perios"
(V
A
) 2/00 B 1<.3/9 ) 28&891.40 after four years
Appeni! A
(V ) *V B (V
7(
(1,;& / perios"
(V ) 28&891.40 B 1.508
(V ) 24&<83./5 after three more years
/,. 7ield (!*# (ran6lin Templeton has 9ust investe 2<&430 for her son (a#e one". This
money will 1e use for his sonEs eu'ation 14 years from now. He 'al'ulates that he will
nee 230&000 1y the time the 1oy #oes to s'hool. 0hat rate of return will Mr. Templeton
nee in orer to a'hieve this #oal%
9$)"& 'olution(
Appeni! $
7(
7(
*V
*V ) (14 perios"
(V
2<& 430
*V ) .153 ?ate of return 1,;
230& 000
= =
Dr
9-13
Chapter 09: Time Value of Money
Alternative solution
Appeni! A
7(
7(
(V
(V (14 perios"
*V
230& 000
(V 3.<38 ?ate of return 1,;
2<& 430
=
= = =
//. 7ield 2ith interpolation (!*# Dn Fanuary 1& ,00<& Mr. -ow 1ou#ht 100 shares of sto'6
at 21, per share. Dn -e'em1er /1& ,010& he sol the sto'6 for 21< per share. 0hat is his
annual rate of return% 7nterpolate to fin the answer.
9$))& 'olution(
Appeni! $
7(
*V
*V
(V
=
7(
21,
*V .334
21<
= =
?eturn is 1etween 15;-18; for / years
7(
7(
*V at 15; .348
*V at 18; .38<
.014
7(
7(
*( at 15; .348
*V 'ompute .334
.00<
7(A
7(A
*V at <; 9.<1<
*V 'ompute 9./48
.55/
Appeni! -
'. Cew payments at 10;
A 7(A
A ) *V L *V (10;& /0 perios"
) 240& 000 L 9.5,4
) 24& 5,8.5<
9$**& (Continued#
-ifferen'e 1etween ol an new payments
2<& 390.,8 ol
4& 5,8.5< new
21&,35.44 ifferen'e
*.V. of ifferen'e K Appeni! -
A 7(A
*V A *V (assumes 10; is'ount rate& /0 perios"
2 1&,35.44 9.5,4
211&9,,.99 Amount that 'oul 1e pai to refinan'e
=
=
=
9-,3
Chapter 09: Time Value of Money
58. 3nnuity 2ith chan1in1 interest rates (!*# Aou are 'hairperson of the investment fun
for the Continental :o''er =ea#ue. Aou are as6e to set up a fun of semiannual payments
to 1e 'ompoune semiannually to a''umulate a sum of 2,00&000 after 10 years at an <
per'ent annual rate (,0 payments". The first payment into the fun is to ta6e pla'e si!
months from toay& an the last payment is to ta6e pla'e at the en of the 10th year.
a. -etermine how mu'h the semiannual payment shoul 1e. (?oun to whole num1ers."
Dn the ay after the si!th payment is mae (the 1e#innin# of the fourth year" the interest
rate #oes up to a 10 per'ent annual rate& an you 'an earn a 10 per'ent annual rate on funs
that have 1een a''umulate as well as all future payments into the fun. 7nterest is to 1e
'ompoune semiannually on all funs.
b. -etermine how mu'h the revise semiannual payments shoul 1e after this rate
'han#e (there are 15 payments an 'ompounin# ates". The ne!t payment will 1e in
the mile of the fourth year. (?oun all values to whole num1ers."
9$*+& 'olution(
Appeni! C
A 7(A
a. A (V L (V
2,00&000 L ,9.44<(5;& ,0 perios"
23&413
=
=
=
1. (irst etermine how mu'h the ol payments are e.ual to after
3 perios at 5;. Appeni! C.
A 7(A
(V ) A B (V (5;& 3 perios"
) 23& 413 B 3.3//
) 255& 854
Then etermine how mu'h this value will #row to after 15
perios at 8; (semi-annual rate".
Appeni! A
7(
(V ) *V B (V (8;& 15 perios"
) 255& 854 B1.9<0
) 2<<& ,0/
9-,4
Chapter 09: Time Value of Money
9$*+& (Continued#
:u1tra't this value from 2,00&000 to etermine how mu'h you
nee to a''umulate on the ne!t 15 payments.
2,00& 000
<<& ,0/
2111& 494