BFW 2631

FINANCIAL MANAGEMENT

TUTORIAL SET 1 WEEK 1

FINANCIAL MATHEMATICS
Important note to students: It is your responsibility to familiarize yourself with your own
personal calculator. Teaching staff are familiar with the Sharp EL735 and Sharp EL738
Business Financial Calculator. Assistance will be provided with the Sharp EL735/EL738
calculator in teaching materials. If you are using any other model then you must learn how to
use them yourself. Do not leave learning the calculator until the last minute. You are also
required to attempt all tutorial questions on your own prior to attending class.
Question 1
Hin Liang is investing $7,500 in a bank term deposit that pays 6.5% annual interest. If the
interest earned every year is reinvested in the deposit account. Complete the table below to
see how the initial investment grows over the five-year period.
Year
1
2
3
4
5

Balance at
Beginning of Year
$7,500
7,,987.5
8,506.69
9,059.62
9,648.50

Interest

Balance at end of year

$487.5
519.19
552.93
588.88
627.15

$7,987.5
8,506.69
9,059.62
9,648.50
10,275.65

a. What will Hin Liangs investment be worth at the end of five years?
FV5= $10,275.65
b. Based on your calculation above, briefly explain whether the interest earned on the investment is
simple interest or compound interest.
It is compound interest since interest is calculated not only on the principal amount but also on the
accumulated interest.
c. In the context of the above example, explain what you understand by the term reinvestment risk.

The risk resulting from the fact that interest earned from an investment may not be able to be
reinvested in such a way that they earn the same rate of return as the invested funds that
generated them. For example, falling interest rates may prevent the interest payments from
earning the same rate of return as the principal investment.

Question 2
Calculate the missing values in the following table

Interest Rate (%)

(%)
12
9
4
20

Number of Years
N
30
16
5
15
3
9

Present Value($)
PV
2250
9310

Future Value($)
FV

265
360
6
400
9
40,000
Note: You have to how to use the formulas and the calculator to obtain the missing values

14,451
550,164
307
761
800
120,000

Solution

FV =PV ( 1+i )N =$ 2250(1+0.12)30=$ 67,409.82

2(i)

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values

Function Keys

30

[N]

2,250 []

[PV]

12

[I/Y]

[COMP]

[FV]

Display on Calculator Screen

67409.82

FV =PV ( 1+i )N =$ 9310(1+0.09)16=$ 36,963.55

2(ii)

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values

Function Keys

16

[N]

9310 []

[PV]

[I/Y]

[COMP]

[FV]

Display on Calculator Screen

36963.55

PV

FV
$14,451

N
(1 i )
(1.04) 5

2(iii)

$11,877.67
Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values

Function Keys

[N]

14451

[FV]

[I/Y]

[COMP]

[PV]

PV
2(iv)

Display on Calculator Screen

-11877.67

FV
$55,0164

N
(1 i )
(1.20)15
$35,708.65

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values
15
550164
20
[COMP]

2(v)

FV
i
PV

FV PV (1 i ) N

1/ N

$307
$265

(1 / 3)

1
= 0.0503 or 5.03%

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values

Function Keys

[N]

265 []

[PV]

307

[FV]

[COMP]

[I/Y]

FV PV (1 i ) N
2(vi)

Display on Calculator Screen

5.03

FV
PV

1/ N

$761
$360

(1 / 9 )

1
= 0.0867 or 8.67%

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values

Function Keys

[N]

360 []

[PV]

761

[FV]

[COMP]

[I/Y]

Display on Calculator Screen

8.67

 FV
PV
N
ln( 1 i)
ln

FV PV (1 i ) N
2(vii)

$800

$400 0.6931
11.89
ln( 1 0.06) 0.0583
ln

years

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values
800
400 []
6
[COMP]

Function Keys
[FV]
[PV]
[I/Y]
[N]
FV
PV
N
ln( 1 i)

2(viii)

11.90

$120,000

$40,000 1.0986
12.75
ln( 1 0.09)
0.0862

ln

ln

FV PV (1 i ) N

Display on Calculator Screen

years

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values
120000
40000 []
9
[COMP]

Function Keys
[FV]
[PV]
[I/Y]
[N]

Display on Calculator Screen

12.75