Time Value of Money Extra Problem Set 1

1. You are planning to retire in twenty years. You'll live ten years after retirement. You want
to be able to draw out of your savings at the rate of $10,000 per year. How much would
you have to pay in equal annual deposits until retirement to meet your obectives!
"ssume interest remains at #$. %$1&'()

&. You can deposit $(000 per year into an account that pays 1&$ interest. *f you deposit
such amounts for 1' years and start drawing money out of the account in equal annual
installments, how much could you draw out each year for &0 years! %$1##+(.1&)

,. -hat is the value of a $100 perpetuity if interest is .$! %$1(&/.'.)

(. You deposit $1,,000 at the beginning of every year for 10 years. *f interest is being paid
at /$, how much will you have in 10 years! %$&0,,#1.,,)

'. You are getting payments of $/000 at the beginning of every year and they are to last
another five years. "t +$, what is the value of this annuity! %,'.&0./()

+. How much would you have to deposit today to have $10,000 in five years at +$ interest
compounded semiannually! %$.((0.#()

.. 0onstruct an amorti1ation schedule for a ,2year loan of $&0,000 if interest is #$.

/. *f you get payments of $1',000 per year for the ne3t ten years and interest is ($, how
much would that stream of income be worth in present value terms! %$1&1++,.'0)

#. Your company must deposit equal annual beginning of year payments into a sin4ing fund
for an obligation of $/00,000 which matures in 1' years. "ssuming you can earn ($
interest on the sin4ing fund, how much must the payments be! %$,/(1')

10. *f you deposit $(',000 into an account earning ($ interest compounded quarterly, how
much would you have in ' years! %$'(#0/.'')

11. How much would you pay for an investment which will be worth $1+,000 in three years!
"ssume interest is '$. %$1,/&1)

1&. You have $100,000 to invest at ($ interest. *f you wish to withdraw equal annual
payments for ( years, how much could you withdraw each year and leave $0 in the
investment account! %$&.'(/)

1,. You are considering the purchase of two different insurance annuities. "nnuity " will pay
you $1+,000 at the beginning of each year for / years. "nnuity 5 will pay you $1&,000 at
the end of each year for 1& years. "ssuming your money is worth .$, and each costs
you $.',000 today, which would you prefer! %$10&&&/ and $#',1&)

1(. *f your company borrows $,00,000 at /$ interest and agrees to repay the loan in 10
equal semiannual payments to include principal plus interest, how much would those
payments be! %$,+/#.)

1'. You deposit $1.,000 each year for 10 years at .$. 6hen you earn #$ after that. *f you
leave the money invested for another ' years how much will you have in the 1'th year!
%$,+1,.()
Time Value of Money Extra Problem Set 2
1. $7,000 dollars 10 years from now at 7% is worth how much today?
2. $10,000 dollars 7 years from now at 10% is worth how much today?
3. How much would you have to put in the an! today at "% to accumulate $1,000 y
ne#t year?
$. %f you doule your money in " years, what interest rate did you earn?
". %f you triple your money in 10 years, what interest rate did you earn?
&. %f you put $100 in the mar!et at the end of every year for 20 years at 10%, how much
would you end up with? 'hat if you put the $100 in at the e(innin( of every year?
7. %f you put $100 in the mar!et today at 10%, how much would you end up with in 20
years?
). %f you orrow $10,000 for a car loan at a &% simple annual interest rate, what would
e your monthly payment on a " year loan?
*. %f you orrow $1"0,000 for a house at a )% simple annual interest rate for 30 years,
what is your monthly payment?
10. + simple annual interest rate of 12% compounded monthly has an effective yield of?
11. + simple annual interest rate of 12% compounded ,uarterly has an effective yield of?
12. + simple annual interest rate of 12% compounded semi-annually is an effective yield
of?
13. %f you want a $1,000,000 for retirement in 30 years, how much would you have to
save y the end of each year if you could ma!e 12% per year? How much would you
have to set aside each year if you could put money away startin( now?
1$. %f you put $"000 in the stoc! mar!et, how many years would it ta!e you to triple your
money if the mar!et is ma!in( 12% a year?
1". %f the effective annual interest rate is )."% per year, what is the nominal annual
interest rate under monthly compoundin(?
1&. %f you put $10 away at the end of each month for the ne#t $0 years at a 12% simple
annual interest rate, how much money would you end up with? 'hat if you started at the
e(innin( of each month?
17. %f you orrow $1"0,000 for a house at )% simple annual interest rate for 1" years,
what is your monthly payment?
1). .eferrin( to ,uestion 17, how much interest did you pay over the 1" years?
1*. 'hat is the value of a $10,000,000 lottery tic!et paid out over 20 years if interest
rates are at &%, the avera(e ta# rate is 3"%, and the odds of winnin( are 1/7,000,000?
20. How lon( would it ta!e to accumulate $"0,000 if you started puttin( $" in the an!
every day startin( at the end of today at simple annual interest rate of 7.3%?
21. How lon( would it ta!e to accumulate $"0,000 if you started puttin( $" in the an!
every month startin( now at a simple annual interest rate of 7.3%? 'hat if you started at
the end of each month?
Answers:
1. 3,"")
2. ",131
3. *"2
$. 1$.)7
". 11.&
&. ",727, &,300
7. &73
). 1*3
*. 1,100
10. 12.&)
11. 12.""
12. 12.3&
13. $,1$$, 3,&**
1$. *.7
1". ).1*
1&. 117,&$7, 11),)2$
17. 1,$33
1). 10),02&
1*. 0alue of winnin( is &,07*,0"). +fter ta# is 0.&" 1 &,07*,0") 2 3,*"1,3)7. 3#pected
value is then 1/7,000,000 1 3,*"1,3)7 2 $."&. 4hus, the e#pected value of the $1 tic!et is
only "& cents. 4hat5s how the state ma!es money6 7lus most states only pay out "0% of
all receipts so they are already up 10,000,000 to start with.
20. ",$*3 days
21. &7* months, &)0 months