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What is the present value of $100 received at the end of the first year and $50 received at the end of the second year and each year after that forever? The discount rate is 10% Ans. P = 100(P/F, 0.1, 1) + 50(P/A, 0.1, inf)(P/F, 0.1, 1) = 545.45 2. What present expenditure would be justified by the prospect of saving of $500 every quarter of the year for 10 years? Assume interest is at 16% compounded quarterly. Ans. Use a period of 3 months. The interest per 3 months is 0.16/4 = 0.04. P = 500(P/A, 0.04, 40) = 9896.39. This is what you should be willing to pay. This illustrates the situation of a compounding period other than one year. The 9896.39 is an investment that saves expenditures in the future. The value of P is the investment that makes the net present worth equal to zero. 3. A person making small loans offers to lend $200 with the borrower required to pay $14.44 at the end of each week for 16 weeks to extinguish the debt. By appropriate use of your interest tables, find the approximate interest rate per week. What is the nominal interest rate per annum? What is the effective interest rate per annum? Ans. The solution is the interest rate at which the net present worth is zero. At 1%, P = 200 + 14.44(P/A, 0.01, 16) = 12.53. At 2%, P = 200 + 14.44(P/A, 0.02, 16) = 3.94. Interpolating: i = 0.01 + 0.01[12.53/(12.53 + 3.94)]= 0.01760 or 1.76%. The effective rate is = (1.0176)52 1 = 2.4774 1 = 1.4774 or 148%/year

4. A man arranges to repay a 5 percent $1000 loan in 10 equal annual installments. After his sixth payment, he borrows another $1000, also at 5 percent, with the following understanding: he is to pay nothing for the next two years and then repay the balance of the first loan plus the entire second loan in eight equal annual installments starting at the end of the third year. What will this annual payment be? Annual payment on loan = 1000(A/P, 0.05, 10) = 129.50. Find the value of A that makes the present worth of the cash flow equal to zero. PW = 1000 129.50(P/A, 0.05, 6) + 1000(P/F, 0.05, 6) A(P/A, 0.05, 8)(P/F, 0.05, 8) = 0 or A = [1000 129.50(P/A, 0.05, 6) + 1000(P/F, 0.05, 6)] / [(P/A, 0.05, 8)(P/F, 0.05,8)] A = [1000 129.50(5.076) + 1000(0.7462)] / [6.463 ¥ 0.6768] A = [342.66 + 746.2] / [4.372] = 249.1

5. Mr. Smith has received an income contract which provides for 25 decreasing payments to himself, starting with $1000 at the end of the first year and decreasing by $20 each year thereafter. Thus his last receipt, at the end of the 25th year, will be $520. Using interest at 10 percent, compute the uniform annual equivalent of these 25 payments. Find the uniform annual equivalent: A = 1000 - 20(A/G, 0.1, 25) = 850.840 6. You are now 25 years old and have just been sold an insurance policy with $10,000 protection on your life. The cost is $170 per year. If you live to age 65, the insurance company will pay you $20,000. Assuming you live to age 65, what portion of the annual cost can be called an investment and what portion of the cost purchased protection? Your minimum acceptable rate of return is 10%. Assume payments are at the end of the year.

Find out how much you would have to invest to save 20,000 in 40 years at 10% interest. A = 20000(A/F, 0.1, 40) = 45.19. Then you are paying 170 45.19 = 124.81 per year for protection 7. A $1000 bond pays 5% simple interest at the end of each year. The bond matures in 20 years at which time the full $1000 is paid to the bond holder. If the current interest rate is 10%, what amount should one pay for the bond? The cash flows associated with the problem are the bond investment at time 0, returns of $50 at the end of each year and $1000 at the end of 20 years. The investment should equal the present worth of the receipts computed at 10% interest. PW = 50(P/A, 0.1, 20) + 1000(P/F, 0.1, 20) = 50(8.5135) + 1000(0.1486) = 425.68 + 148.64 = 574.32

8. A bank pays 10% annual interest compounded quarterly. What is the effective annual interest rate? The interest rate per quarter is 0.1/4 = 0.025 per quarter. The effective rate is the annual rate that yields the same annual return as when the interest is compounded quarterly. 1 + i_eff = (1 + 0.025)4 . Therefore, i_eff = 10.38%. 9. You borrow $2000 from the Credit Union. The interest rate is 12% annually (nominal). You pay back the bank in 24 equal installments starting one month from the date you borrow the money. a. What is your monthly payment? The monthly payment is: A = 2000(A/P, 0.01, 24) = 211.16. b. How much of your first payment is interest? The interest in any period is the money still owed times the interest rate. In the first period the money owed is 2000 so the interest in the first payment is 2000(0.01) = $20. Time Value of Money Problems 1. What will a deposit of $4,500 at 10% compounded semiannually be worth if left in the bank for six years? a. $8,020.22 b. $7,959.55 c. $8,081.55 d. $8,181.55 2. What will a deposit of $4,500 at 7% annual interest be worth if left in the bank for nine years? a. $8,273.25 b. $8,385.78 c. $8,279.23 d. $7,723.25 3. What will a deposit of $4,500 at 12% compounded monthly be worth at the end of 10 years? a. $14,351.80

80 4. Given an annual opportunity cost of 10%. b.000 d. you would prefer $15. $13. $14.199 b.120 c. If you require a 9 percent annual return on your investments.3896. $1.210 7. $10.348 c. $1.100 d.000 to grow into $6. True b.40 d.438 5. How much will $1. $1. .000 ordinary annuity for 10 years? a. False 9. $1. a.000 deposited in a savings account earning a compound annual interest rate of 6 percent be worth at the end of 3 years? a.851.200 b. 2 years.338 b. $1. How much will $1. Given an annual opportunity cost of 10%. How long does it take for $5. c.891 d.80 c. $1.000 8. $1.000 deposited in a savings account earning an annual interest rate of 6 percent be worth at the end of 5 years? a.739 c. 4 years. $14. what is the future value of a $1. $1.388 d.937 b.000 ordinary annuity for 1 year? a.191 c.724. $1. $15.304.44 at 10% compounded quarterly? a.997. $1. what is the future value of a $1.000 per year for 15 years. $1. $12.b.000 five years from today rather than an ordinary annuity of $1. $1. 3 years. $15.

79 13. 8.38 b. $1. $4. How long does it take for $856 to grow into $1.800.27 b.55 b.3812. $3. How much will an ordinary annuity of $650 per year be worth in eight years at an annual interest rate of 6 percent? a. $1. What annual interest rate would you need in order to have an ordinary annuity of $7.343.500 c. 2 years. 4 years.66 c.47 d.822. $6. 10. 6 years. 11. $1. d.250.433.500 per year accumulate to $279. $6.975.366. He's eight now and will start college in 10 years.600 in 15 years? a. $6. $4. $6.122 at an annual interest rate of 7%? a.2% . b.76 c. $1.d.021. How much will an ordinary annuity of $650 per year be worth in eight years at an annual interest rate of 8 percent? a. $6. 30 months. How much will they have to set aside at the end of each year to have $65.75% b.55 15.897.393. $7.10 c.624.704. 10.80 d.975. c. $4. $4.89 d. 30 months.913. How much must you deposit at the end of each year in an account that pays an annual interest rate of 20 percent.500 b. The Wintergreens are planning ahead for their son's education.72 14. $8. if at the end of 5 years you want $10.79 d.000 in the account? a.000 in 10 years if the annual interest rate is 7%? a.

5%17. 18% 18. a period of 17 years. 17% d. What is the present value of $800 to be received at the end of 8 years. What is the present value of $800 to be received at the end of 8 years. 12% d. 5% c. 19. assuming an interest rate of 20 percent. 11% b.850 and are repaid $2. d.66 in two years? a.29 years. What annual interest rate is implied if you lend someone $1.500 and repay $21. $169. 10% c.14 years. By 1995.5% 20.000 to invest. its earnings had grown to $1. 6% d. The Tried and True Corporation had earnings of $0. 12% b.00 b. quarterly compounding? a. 4.24 in three years with monthly compounding? a. 6 years. 5. 15% c.5 years.89 21.39 c.364. c. What nominal annual interest rate is implied if you borrow $12. 4% b. 14% 16. $167. assuming an annual interest rate of 8 percent? . b.078.c. how long will it take for the $10.000 to double if it is invested at an annual interest rate of 14 percent? a. 11. 6. Assuming annual compounding. You have $10. 5. $172.01 per share. $165.20 per share in 1978.89 d. 12% d. What was the compound annual rate of growth in the company's earnings? a.

000 in cash. $441 d. What would you pay for an ordinary annuity of $2.100 b. $701. What would you be willing to pay for a $1.41 d. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise. the bond will be retired and the holder will receive $1. $180. $958 c.000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield an annual interest rate of 7 percent? (Note: At maturity.) a.500. $1.35 c.000 face. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise. $1. Bonds typically are issued with $1.08 b. $101.000 in cash.20 d. Bonds typically are issued with $1. or par. $979 25.01 c. $100. what is it worth today? a. $13.) a. A $10. $43722.000 face. or par. If this land grew in value at an annual interest rate of 8 percent. Jesse Jones bought 10 acres of land for $1.630 c.000 d. What would you be willing to pay for a $1. $432 c.000 car loan has payments of $361. $601. values.630 24.000 paid every six months for 12 years if you could invest your money elsewhere at a nominal interest rate of 10% compounded semiannually? a.52 due at the end of each month for three years. . $100.60 b. $26.630 b. $425 b. values. $607. Thirty years ago. $25.000 per acre in what is now downtown Houston.957. $608.900 d.798. the bond will be retired and the holder will receive $1. $27.a.597.20 23.0826.000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield an annual interest rate of 12 percent? (Note: At maturity.

$767 d. $6. Over the years. Your great-uncle Claude is 82 years old. he has accumulated savings of $80.796. a.000 into an account earning 10 percent annually and sets it up in such a way that he will be making 10 equal annual withdrawals (the first one occurring 1 year from now) such that his account balance will be zero at the end of 10 years. a. 18% c. $675 d. how much will he have at the end of three years? a. Find the present value of $1. $6.79 d. 10% 27.976. compounded semiannually. $6. 15% b.000 to be received at the end of 4 years at a nominal annual interest rate of 12%. Joe Ferro's uncle is going to give him $250 a month for the next two years starting today.) Uncle Claude places his $80. Given a 15% annual opportunity cost. True b. $6.25 b. If Joe deposits every payment in an account paying a nominal annual interest rate of 6% compounded monthly. $637 c.What is the nominal interest rate? a.00 nine years from now. False31. How much will he be able to withdraw each year? .837. (If he lives longer than that.23 28. $627 b.389. he figures you will be happy to take care of him.000. Find the present value of $1. $622 30. He estimates that he will live another 10 years at the most and wants to spend his savings by then. $779 29. a.00 three years from now is worth more than $2. $795 b. 16% d. $1. $789 c.000 to be received at the end of 2 years at a 12% nominal annual interest rate compounded quarterly.28 c.

The bond was given to you by your late great-aunt Hilda on your second birthday. $3. Which option should she choose.000 lifetime ordinary annuity-whichever she chooses. What are the annual sinking fund payments? a. What is the current worth of the bond (principal plus interest)? a. 3% b. $13.294 b. $677.a. Interest accumulates and is paid at the time the bond is redeemed.500 b.000 bond at the bottom of their safe deposit box.22 d.180. the policy will have a cash surrender value of $37. $13. end-of-year deposits into the fund.421 c. 4. Your mother is in reasonably good health and expects to live for at least 15 more years. assuming that an 8 percent annual interest rate is appropriate to evaluate the annuity? a.000 or a $6. The bonds require Strikler to establish a sinking fund and make 10 equal. What annual rate of interest is the insurance company promising you on your investment? a. $51.535 c. has issued a $10 million. Her firm has offered her a lump sum retirement payment of $50. and the sinking fund should have enough accumulated in it at the end of 10 years to retire the bonds. $689. A life insurance company has offered you a new "cash grower" policy that will be fully paid up when you turn 45.294 c. These deposits will earn 8 percent annually.354 b.000. Your mother is planning to retire this year. Inc. $52. $52. $3. Strikler.294 .989.4% c.328 34.728.614. 3. $13.019. 4. At that time. When you turn 65. Your parents have discovered a $1. $3. $3.8% d. it will have a cash surrender value of $18.71 b.327 d.1%35. You are now 27 years old.50 c.862 d. The bond pays an annual interest rate of 5 percent. 10-year bond issue. $51. $690.386 33.63 32. $12.

$625 b. $12. Steven White is considering taking early retirement. $655 c.751.19 b.37 b. $12. $13.000 per year is withdrawn at the end of each year. should the investment be undertaken? a.652.852 d.000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 8 percent.342 36. Determine the value at the end of 3 years of a $10. No40. . $13. a. White desires to determine how many years the savings will last if $40.871 c. If you deposit $25. a.911 37. $16. If you require a 20 percent annual rate of return on this type of investment.812. Determine the value at the end of 3 years of a $10. $689. compounded semiannually. 6. $602 41.702. $16.000 today. a.653. and 8. If you require a 15 percent annual rate of return on this type of investment. 7. A Baldwin United Company agent has just presented the following offer.000 with the firm today. having saved $400.19 d. compounded monthly. 12 years. An investment requires an outlay of $100. $12.21 39.27 d.37 c. $12.000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 8 percent.000. $12. $13. Calculate the present value of a perpetuity bond that is expected to pay $50 of interest per year if the investor requires an annual return of 8 percent.871 b. it will pay you $10.d. 5. Yes b.000 per year at the end of years 4. $15.563.642. $565 d.652. White feels the savings can earn 10 percent per year. would you make this investment? a. $16. a.37 38.21 c.000 per year at the end of years 8 through 15. Cash inflows from the investment are expected to be $40.

15 years. 0. ANSWER: c SOLUTION: FV = PV [FVIFi .949% c. c.500 [ +/.081. 0.55.081. $7. 42.181. $8.35 Solution: 8. 1.] [PV] 12 [N] 10 [I/Y] [CPT] [FV] Solution: 8.500 at 10% compounded semiannually be worth if left in the bank for six years? a.500 at 7% annual interest be worth if left in the bank for nine years? .020. $8. What is the monthly rate of interest that will yield an annual effective interest rate of 12 percent? a.12] = $4.500 [ +/. 1.35 2.7959) = $8. What will a deposit of $4.500 [FVIF5%.499% b. $8.5 years. 10 years. 14.22 b.55 d.949%THE PROBLEM BANK .b. n] FV = $4.55 c.] [PV] 12 [N] 10 [I/YR] [FV] 4.959.081.Time Value of Money Section 1 . What will a deposit of $4.953% d.Basic 1.081.500 (1.55 KEYSTROKES: HP T I 2 [ '] [P/YR] 4. d.SOLUTIONS Part 1 .

191 .997. $13.500 [FVIF7%.25 ANSWER: a SOLUTION: FV = PV [FVIFi .000 deposited in a savings account earning an annual interest rate of 6 percent be worth at the end of 3 years? a.23 d.500 at 12% compounded monthly be worth at the end of 10 years? a.385.723.000 deposited in a savings account earning an annual interest rate of 6 percent be worth at the end of 5 years? a.338) = $1.40d. $1.851. n] FV = $4. $14.9] = $4.348 c.851.389 ANSWER: b SOLUTION: FV3 = $1. $1.a.500 (3. $14.000 (1.338 b. How much will $1. $1.500 (1.199 b.25 3.438 ANSWER: a SOLUTION: FV5 = $1. $1.279.273.500 [FVIF1%. $8. n] FV = $4.351.273.25 b.191) = $1.80 4. $1. $7.80 b. How much will $1.891 d.3) = $1. What will a deposit of $4.191 c. $1.80 ANSWER: b SOLUTION: FV = PV [FVIFi . $14.80 c. $1. $1.000 (1.000 (FVIF6%.120] = $4.388 d.304.8385) = $8.5) = $1. $8. $8.3004) = $14.000 (FVIF6%.338 5.78 c.

000 per year for 15 years. a.061) = $8. $15.937 b.000) (15.000 ANSWER: a SOLUTION: FV10 = ($1. $1. True b. $1. you would prefer $15.15) = $1.750 Present value of a 15 year. $1.10) = $1.650) = $9.000) (1.937 8. what is the future value of a $1.1) = ($1. Given an annual opportunity cost of 10%. KEYSTROKES: HP T I A) 15. If you require a 9 percent annual return on your investments.000 (PVIFA9%.000 received in 5 years at 9%: PV = $15.100 d. what is the future value of a $1. $10.739 c.10) = ($1. $1. $12.210 ANSWER: c SOLUTION: FV1 = ($1.000 in five years because it has the highest present value.000 ordinary annuity for 10 years? a.000 ordinary annuity for 1 year? a.000 ordinary annuity at 9%: PVA15 = $1.1007.000 (8.000 (0.000 d.061 Therefore.200 b. $15.000 (PVIF9%. False ANSWER: a SOLUTION: Present Value of $15.000) (FVIFA10%.120 c. Given an annual opportunity cost of 10%.000 [FV] 5 [N] . $1.5) = $15.937) = $15.6.000) (FVIFA10%. you prefer $15.000 five years from today rather than an ordinary annuity of $1.

748.060. n] $5. 4 years d.5%.69 (cost = value) A) 15.748.000 to grow into $6. How long does it take for $5.97 (cost = value) B) 1.69 (cost = value) Solution: -9. 2 years b.97 (higher cost = higher value) Solution: -9.724.97 (cost = value) B) 1.n = 0.060.7436 .000 [FV] 5 [N] 9 [I/Y] [CPT] [PV] Partial Solution: -9.748. 3 yearsc.n] PVIF2.97 (higher cost = higher value) 9.44 at 10% compounded quarterly? a.748.000 [PMT] 15 [N] 9 [I/Y] [CPT] [PV] Partial Solution: -8.000 [PMT] 15 [N] 9 [I/YR] [PV] Partial Solution: -8.000 = $6.9 [I/YR] [PV] Partial Solution: -9.44 [PVIF2.5%.724. 30 months ANSWER: b SOLUTION: PV = FVn [PVIFi .

122 [PVIF7%. n] $856 = $1.n = 0.80 d. n] FVA8 = $650 [FVIFA6%. 6 years c.021.n] PVIF7%.724.122 at an annual interest rate of 7%? a. How much will an ordinary annuity of $650 per year be worth in eight years at an annual interest rate of 6 percent? a.000 [ +/.433.7629 n = 4 years 11. 30 months ANSWER: c SOLUTION: PV = FVn [PVIFi . 2 years b.38 b.724.433.8] = $650 (9.76 c. $8.000 [ +/.] [PV] 6.38 .] [PV] 6. $6.44 [FV] 10 [I/YR] [N] [ 2nd ] [P/Y] 4 [ENTER] [ Ú] 4 [ENTER] 5. $7.8975) = $6. 4 years d.975. $6.44 [FV] 10 [I/Y] [CPT] [N] Solution: 12 quarters Solution: 12 quarters 10.897. How long does it take for $856 to grow into $1.n = 12 quarters = 3 years KEYSTROKES: HP T I 4 [ '] [P/YR] 5.38 ANSWER: d SOLUTION:FVAn = PMT [FVIFAi .

343.433.6366) = $6.000 in the account? a. $1. $1.343. $6.79 d.79 13.10 c.35 Solution: 6.66 c.000 in 10 years if the annual interest rate is 7%? a. $1.250. $1. $6.000 = PMT (FVIFA20%.79 ANSWER: c SOLUTION: FVA8 = $650 [FVIFA8%.35 12.822. How much will an ordinary annuity of $650 per year be worth in eight years at an annual interest rate of 8 percent? a.800.500 b.KEYSTROKES: HP T I 650 [ +/.] [PMT] 8 [N] 6 [I/Y] [CPT] [FV] Solution: 6. How much must you deposit at the end of each year in an account that pays an annual interest rate of 20 percent. He's eight now and will start college in 10 years.27 b.366. $4.47 d.55 . $4.704.913. How much will they have to set aside at the end of each year to have $65.8] = $650 (10.] [PMT] 8 [N] 6 [I/YR] [FV] 650 [ +/.913. $6.72 14. The Wintergreens are planning ahead for their son's education. if at the end of 5 years you want $10.5) = PMT (7.442) PMT = $1.72 ANSWER: d SOLUTION: FVA5 = $10.433.393.

$4. 5.600 = $7. 14% ANSWER: c SOLUTION: FVAn = PMT [FVIFAi . 12% d. 6% d. 10. 12% .704.66 in two years? a.000 = PMT [FVIFA7%.00 [FVIFi . What annual interest rate is implied if you lend someone $1. 8.600 in 15 years? a.75% b.078.b.5% ANSWER: c SOLUTION: FVn = PV [FVIFi . n] $65.078.28 k = 12% 16.500 c.2% c.500 and repay $21.624. $4.15 = 37.1236 i = 6% 17. What nominal annual interest rate is implied if you borrow $12.850. n] $2.500 [FVIFAi. n] $279.8164) PMT = $4.975. 4% b. $3.89 d.500 per year accumulate to $279.2 = 1.24 in three years with monthly compounding? a.364.66 = $1. 2] FVIFk. What annual interest rate would you need in order to have an ordinary annuity of $7.850 and are repaid $2.55 15. 5 % c.15] FVIFAi.10] = PMT (13.55 ANSWER: aSOLUTION: FVAn = PMT [FVIFAi .

29 years 19.000 to invest. 17% d. 5.24 = $12.000 to double if it is invested at an annual interest rate of 14 percent? a.500.01 per share. FV17 = PV(FVIFi.5% x 12 = 18% 18.17) 1.17) 0. 12% d. 4.b.5% iNom = 1. By 1995. its earnings had grown to $1.14 years Actual time (calculator accuracy) = 5. 11. The Tried and True Corporation had earnings of $0.17) .01 = 0.36 = 1. 11% b.36] FVIFi.5 years c.7091 i = 1.00 [FVIFi.14 years ANSWER: c SOLUTION: 72/14 = 5. 10% c. a period of 17 years. how long will it take for the $10. i = 10% from a PVIF Table Alternatively. 15% c.20 per share in 1978. Assuming annual compounding. 6.20 (FVIFi. 6 years b.364.198 Therefore.29 years d. n] $21. 18% ANSWER: d SOLUTION:FVn = PV [FVIFi .01 (PVIFi.17) PVIFi. You have $10.17 = 0.20 = 1.5% ANSWER: b SOLUTION: PV = FV17 (PVIFi. What was the compound annual rate of growth in the company's earnings? a.

quarterly compounding? a.20 23. $13.597. $441 d. i = 10% from a FVIF Table 20.89 (by calculator) 21. $100.39 c.540) = $432 22. What would you pay for an ordinary annuity of $2. $165.20 d. What is the present value of $800 to be received at the end of 8 years.000 paid every six months for 12 years if you could invest your money elsewhere at a nominal interest rate of 10% compounded semiannually? a.798.89 ANSWER: cSOLUTION: PV = $800 (PVIF5%. What is the present value of $800 to be received at the end of 8 years. Jesse Jones bought 10 acres of land for $1.957.000 per acre in what is now downtown Houston.17 = 5.05 Therefore. $169.32) = $167. what is it worth today? a. n] PVA24 = $2. assuming an interest rate of 20 percent.20 ANSWER: c SOLUTION: PVAn = PMT [PVIFAi . $26.35 c. $167. $432 c. Thirty years ago. $425 b. assuming an annual interest rate of 8 percent? a.00 b.FVIFi.7986) PVA24 = $27.89 d. $27. $172. $25. $437 ANSWER: b SOLUTION: PV = $800 (0.500. 597. If this land grew in value at an annual interest rate of 8 percent.60 b.630 .000 [PVIFA5%.24] = $2.000 (13.

000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield an annual interest rate of 7 percent? (Note: At maturity.000 car loan has payments of $361. 15% . the bond will be retired and the holder will receive $1.b.000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield an annual interest rate of 12 percent? (Note: At maturity.900 d. Bonds typically are issued with $1.063) = $100.000 (0. $180.630 c. or par.000 face.08 b.78 using tables. $100.08 ANSWER: b SOLUTION: PV = $70 (7.000 d. $979 ANSWER: c SOLUTION: PV = $70 (11.000 in cash. $101.30) = $10. What would you be willing to pay for a $1. What is the nominal interest rate? a.000 (0. the bond will be retired and the holder will receive $1. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise. $601.654) + $1.843) + $1.630 24. $607. $1.52 due at the end of each month for three years.01 26. $608.) a.01 c. values.) a. $1.000 in cash. $958 c. difference from $1.41 d.000) (FVIF8%.000 due to rounding) 25. values.000 ($999. $701. Bonds typically are issued with $1. The actual market value at any point in time will tend to rise as interest rates fall and fall as interest rates rise. What would you be willing to pay for a $1.100 b. or par.059) = $608.000 (10. A $10.630 ANSWER: a SOLUTION: FV30 = 10 ($1.184) = $1.000 face.

23 ANSWER: d SOLUTION: 1) FVA24(Annuity Due) = PMT [FVIFAi . how much will he have at the end of three years? a.25 b.661 ki = 1.5%.04 OR $6.5%.79 which stays in the bank for another year: 2) FV12 = $6. $6.4320) (1.b. $6.5% = 18%27.36 = 27.28 c.0617) = $6. $6.79 [FVIF0. n] $10.837.005) FVA24 = $250 (25. If Joe deposits every payment in an account paying a nominal annual interest rate of 6% compounded monthly.] [PMT] 24 [N] 6 [I/YR] [FV] .12] =$6.005) = $6.784.389.389.79 d.24] (1.976. 16% d. 18% c.796.389. n] (1 + k) FVA24 = $250 [FVIFA0. $6. 10% ANSWER: b SOLUTION: PVA = PMT [PVIFAi .389.79 (1.36] PVIFAi.5% kNom = 12 x 1.52 [PVIFAi. Joe Ferro's uncle is going to give him $250 a month for the next two years starting today.783.89 by calculator KEYSTROKES: HP T I [ '] [BEG/END] 12 [ '] [P/YR] 250 [ +/.000 = $361.

$637 c.389.389.] [PV] 12 [N] 6 [I/YR] [FV] [ 2nd ] [BEG] [ 2nd ] [ENTER] [ 2nd ] [P/Y] 12 [ENTER] [ Ú] 12 [ENTER] 250 [ +/.389.000) (PVIF3%.] [PV] 12 [N] 6 [I/Y] [CPT] [FV] Solution: 6. $767 d.89 Solution: 6.789) = $78929. $779 ANSWER: b SOLUTION: PV = ($1.78 [ 2nd ] [QUIT] 6.000) (0.Partial Solution: 6.000 to be received at the end of 2 years at a 12% nominal annual interest rate compounded quarterly. compounded semiannually.78 [ +/.783.89 28. $627 b. $622 .783.000 to be received at the end of 4 years at a nominal annual interest rate of 12%.] [PMT] 24 [N] 6 [I/Y] [CPT] [FV] Partial Solution: 6. $795 b. a.78 [ '] [CLEAR ALL] 6.389. $789 c. a.8) = ($1. $675 d. Find the present value of $1. Find the present value of $1.78 [ +/.

9) = ($2.71 Calculator solution = $13.50 c.000) (PVIF6%. False ANSWER: a SOLUTION: PV = ($1.66 PV = ($2.000.00 nine years from now. a.000 = PMT (PVIFA10%.00) (PVIF15%. Your great-uncle Claude is 82 years old.00 at end of three years is worth more.00) (0.3) = ($1.57 Based on these calculations.] [PV] 0 [FV] 10[N] 10[I/YR] [PMT] .00) (0. Given a 15% annual opportunity cost. How much will he be able to withdraw each year? a.019. $13. He estimates that he will live another 10 years at the most and wants to spend his savings by then.180. he has accumulated savings of $80.63 KEYSTROKES: HP T I80.000) (0. 31.8) = ($1. $12.000 into an account earning 10 percent annually and sets it up in such a way that he will be making 10 equal annual withdrawals (the first one occurring 1 year from now) such that his account balance will be zero at the end of 10 years.989. (If he lives longer than that.284) = $0.627) = $627 30.658) = $0.71 b. he figures you will be happy to take care of him. True b.63 ANSWER: d SOLUTION: PVA10 = $80.) Uncle Claude places his $80. $1.00) (PVIF15%. $13.019.614.145) PMT = $13. Over the years. $1.018.10) = PMT (6. $13.22 d.000 [ +/.00 three years from now is worth more than $2.ANSWER: a SOLUTION: PV = ($1.

34.000 bond at the bottom of their safe deposit box.728.386) = $3. she should take the annuity.421 c.000 (3.559) = $51.386 33. What annual rate of interest is the insurance company promising you on your investment? .000 [ +/. When you turn 65. At that time. Your parents have discovered a $1. The bond was given to you by your late great-aunt Hilda on your second birthday.25) = $1. Your mother is planning to retire this year.000 lifetime ordinary annuity-whichever she chooses. What is the current worth of the bond (principal plus interest)? a.535 c.63 32.328 ANSWER: a SOLUTION: PVA15 = $6. $3. $3.15) = $6.80. $3.000.019. Interest accumulates and is paid at the time the bond is redeemed.500 b.000 lump sum payment. $52.000 (8.862 d.63 Solution: 13. $52. Which option should she choose.354 Because the lifetime annuity has a higher expected present value than the $50. assuming that an 8 percent annual interest rate is appropriate to evaluate the annuity? a. A life insurance company has offered you a new "cash grower" policy that will be fully paid up when you turn 45.000 (PVIFA8%.000 or a $6.019.000 (FVIF5%. $51. Your mother is in reasonably good health and expects to live for at least 15 more years. it will have a cash surrender value of $18.] [PV] 0 [FV] 10[N] 10[I/Y] [CPT] [PMT] Solution: 13. The bond pays an annual interest rate of 5 percent. $51.386 ANSWER: d SOLUTION: FV25 = $1. $3. Her firm has offered her a lump sum retirement payment of $50.354 b. You are now 27 years old.327 d. the policy will have a cash surrender value of $37.

1%ANSWER: c SOLUTION: $18.a. end-of-year deposits into the fund.000 (PVIFA15%.000. and the sinking fund should have enough accumulated in it at the end of 10 years to retire the bonds.871 b.852 d.487) PMT = $690.8) (PVIF10%. $690.000 with the firm today. Inc. Strikler.4% c.10) = PMT (14.4771 From a PV Table. $16. 3.342 ANSWER: c SOLUTION: FVA10 = $10.7) PV = $10.000 = PMT (FVIFA8%.20) PVIFi.8% (by interpolation.911 ANSWER: a SOLUTION: PV = $10. 4.294 b. rounded) 35. 10-year bond issue. has issued a $10 million. $689.000 per year at the end of years 8 through 15.000 = $37. $689. 3 % b. i = 3.000. A Baldwin United Company agent has just presented the following offer.20 = 0. $677.487) (0. $15. . These deposits will earn 8 percent annually. $16.376) PV = $16.871 Because the present value of the promised payments is substantially less than the required deposit of $25.294 c. If you require a 15 percent annual rate of return on this type of investment. it will pay you $10. The bonds require Strikler to establish a sinking fund and make 10 equal.728 (PVIFi. 4.871 c. $16.8% d.294 d. would you make this investme n t ? a.000 (4.294 36. What are the annual sinking fund payments? a. If you deposit $25. this is an undesirable investment.

000 today. $13.37 c. a.37. $12. $12. If you require a 20 percent annual rate of return on this type of investment.653. 5. 6.08/12) ] 36 = $12. 7.652. compounded semiannually.21 ANSWER: c SOLUTION: FVn = PV0 [ 1 + (iNom/m) ] mn FV3 = $10.37 (by calculator) 38.812. $13.751. $12. should the investment be undertaken? a.19 b.19 d. No ANSWER: b SOLUTION: NPV = $40.37 b.000 per year at the end of years 4.37ANSWER: b SOLUTION: FVn = PV [ 1 + (iNom/m) ] mn FV3 = $10.5) (PVIF20%. compounded monthly.3) .000 (2.21 c.19 39.000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 8 percent. $12.000 (PVIFA20%. a.08/2) ] 6 = $12.702.652. An investment requires an outlay of $100.$100. Cash inflows from the investment are expected to be $40.000 .579) .702.000 NPV = $40.653.642. $12.000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 8 percent.0000 [ 1 + (0. Determine the value at the end of 3 years of a $10. and 8. $13.$100.991) (0.0000 [ 1 + (0.563. Y es b.27 d. Determine the value at the end of 3 years of a $10.

12 years b. What is the monthly rate of interest that will yield an annual effective interest rate of 12 percent? a. $655 c.n) $400. Calculate the present value of a perpetuity bond that is expected to pay $50 of interest per year forever if the investor requires an annual return of 8 percent.000 = $40. White desires to determine how many years the savings will last if $40.949% ANSWER: b SOLUTION: EFF% = (1 + ( i .10 = $40.08 = $62541. 1.000 42.000 per year is withdrawn at the end of each year.949% c. a.953% d. 1.NPV = $-30. i. 40. $400. e.0000 (PVIFA10%.n) PVIFA10%. at 10% per year his $400. $602 ANSWER: a SOLUTION: PV (Perpetuity) = $50/0. 10 years ANSWER: d SOLUTION: PVAn = PMT (PVIFA10%.5 years d. 15 years c. 0. $565 d. 0. Steven White is considering taking early retirement.000 x 0.728 The project should not be undertaken. $625 b. White feels the savings can earn 10 percent per year.000 savings will last forever. 14.000. a.n = 10 Therefore. having saved $400.499% b.

00949 = i NOM / 12 i NOM / 12 = . All Rig .NOM / M)) M .1 1.949% © 2004 South-Western College Publishing.1 12% = (1 + ( i NOM / 12)) 12 .12 = (1 + ( i NOM / 12)) 12 1.00949 = 1 + ( i NOM / 12) 0.