.Maditiona .... Questions and Problems 1, If the real interest rate is + percent and the inflation rate is 6 percent, what is the nominal int est rate’? 2. If the real interest rate is 1.8 percent and the inflation rate is 6.2 percent, what is the nominal interest rate? 3. If the nominal interest rate is 10 percent and that inflation rate is 4 percent, what is the real inter est rate? 4. If the nominal interest rate is 14.4 percent and that inflation rate is 8.8 percent, what is the real imterest rate? 5. If the nominal interest rate is 6 percent and the real rate is 4 percent, what is the inflation rate? 6. If the nominal interest rate is 18.4 percent and the real r rate? ic is 7.6 percent, what is the inflation 7. Assume that you deposit $1,200 into an account today. If the account pays interest of 7.9 percent P.a., how much will you have in your account exactly one year from today? 8. Assume that you deposit $3,500 into an account today. If the account pays interest of 8.35 per- cent p.a., how much will you have in your account exactly two years from today? 9. Assume that you deposit $2. interest of 5.6 percent p.a., how much will you have in your account exactly two years from today into an account exactly one year from today. If the account pays 10. Assume that you deposit $2,400 into an account today and that you deposit another $2,400 into the same account exactly one year from today. If the account pays interest of 4.88 percent p.a. how much will you have in your account exactly one year from today? 11, Assume that you deposit $318 into an account today and that you deposit another $552 into the same account exactly one year from today. If the account pays interest of 8.18 percent p.a., how ‘much will you have in your account exactly two years from today? 12, Assume that you deposit $750 into an account exactly one year from toda another $875 into the same account exactly two years from today. If the 9.5 percent p.a., how much will you have in your account exactly two y and that you deposit iccount pay’ interest of sars From tod: I you want to have exactly $4,000 in your account at t= 1, how much must you deposit into that account at t = 0 if the account pays interest of 6.6 percent p.a..? , 189| 14, 16. 19, 20. 190 If you want to have exactly $6 account at in your account at t = 2, how much must you deposit O if the account pays interest of 4.95 percent pra.? to that Tour requied rate of return is 11 percent p.a. and you have access to two investment opportunities {he first one costs $13,631 today and yields $15,200 at the end of the year. The second ene core $3:211 today and will yield $3,600 at the end of one year. Which, if any, investment or investments would you choose’? ‘our required rate of return is 14 percent p.a. and you have access to two investment opportunities, THe Lt one requis you to invest $38,439 today and will yield $42,346 at the end ofthe fist year ‘The second one costs you $41,489 today and will yield you $23,100 at the end of each ofthe next ten years. Which, if any, investment or investments would you choose? Choose the one answer that ¢: 10 percent. " be correct without using a calculator. Your required rate of return is a. The present value of $432 to be received at t = 1 is $432 b. The t Value of a t= 0 cash flow of $7,811 is $7,770 & You would pay $6.600 today for an asset that yields $2,300 at the end of each ofthe next two years, 4: You would pay $6,600 today for an asset that yields $3,905.21 at the end of each of the next two years You require making the following withdrawals from your account—$35,000 atthe end ofthe first year and $47,000 at the end ofthe second year. Ithe interest rate is 10 percent p.a., what is the least ameuet {hut you would need to deposit into the account today so that you can make these withdrawals? Cheek ‘Your answer by tracing the amounts in your account over time as we did in the chapter. You deposit $12,000 today in an account that pays 14 percent p.a. interest. You plan to withdraw $12,000 from this account at the end ofthe first year. How much will be left in yout account 4. at the end of the first year after the withdrawal? b. at the end of the second year? Your required rate of return is 13 percent p.a, A two-year investment requires you to pay $10,000 today and will yield $7,000 at the end of the first year and an amount SX at the end of the sevond vyear ‘What is the least amount that X should be for you to make this investment? Nou deposited $3.500 in the bank two years ago, and the account now has $4,100 init today, What has been the “p.a.” interest rate on this account? A magazine subscription offer states that you can purchase one-year subscription for $48 today and 2 hwo dear subscription for $70 today. Assuming that there will be no price changes in the future, which subscription would you choose if your required 1 of return is 10 percent p.a.? You have two monthly car payments of $400 each left on your cat If the interest rate is 0.75 percent Per month, how much would you be required to pay the lenderit you wanted to pay off the loa today? ay aler offers you the following two payment choices onacar tht you would like to buy. The price ofthe car is $20,000. (a) Pay the entire amount today and receive a discount of $2,850. (b) Pay $20,000 atthe end of two years. Which alternative would you choose ifthe interest rate is 8 percent pa? Chapter six & &19. 20. 222 Assume that you deposit $2,000 each year for the next twenty years, starting one year from today, in dh acvount that pays 9.6 percent interest per year, compounded annually. If exactly ten years from today you withdraw $5,000 from the account, how much will bein your account on the day you make the last deposit (that is, at the end of year 20)? ‘A security pays you $40 every six months for thirty years and, additionally, at the end of the thirty Years, pays you 81,000. The present value of this security is $1.11. What is the stated pua. rate of return? What is the effective p.a. rate of return? You loan your friend $100,000 today. She will pay you $10,000 per year for the first five years, and ‘will make five more equal yearly payments. If the interest rate is 12 percent p.a., what should be the size of these payments? You loan your friend $100,000. He will pay you $12,000 per year for ten years and a balloon payment at t = 10 of $50,000, What is the interest rate that you are charging the friend? You have borrowed $35,000 at 12 percent p.a. and plan to repay it in seven years with equal yearly installments, What is the size of these installments, Just after you make the fourth payment, what will be the remaining loan balance? You borrowed some money at 11 percent p.a. You repay the loan by making first six yearly install- ments of $10,000, then three yearly installments of $12,000, and then four yearly installments of $15,000. How much had you borrowed? You have just had a second child. You expect thatthe child will o to college after eighteen years. Col- lege will be for four years, and each year will cost you $33,000. The payments are to be made at the beginning of each college year. that isthe first payment will be at t= 18. Your first child will goto col lege after wvelve years and college will cost $25,000 per year for four years with the first payment due att = 12. You had started saving for the first child’s education when the child was born six years ago. ‘You have $20,000 in that account today and plan to make ten more equal yearly payments beginning (1 To have exactly enough money for education of both children, how much should you deposit cach year? The account pays interest at 8 percent p.a. A factory generates $800,000 per year for the next ten years. Ifthe discount rate is 12 percent, what is the factory worth today? What will the factory be worth at the end of five years? Chapter Sevende ddd ddd dd ddd ddd eee 27. 28, 29, 31 If a five-year ordinary annuity has a present value of $1,000 and if the interest rate is 10 percent pt. what is the amount of each annuity payment? tream of cash Assume that your required rate of return is flows: rercent and you are given the followit Year Cash Flow 1 $10,000 2 $15,000 3 $15,000 4 $15,000 5 $15,000 6 $20,000 If payments are made at the end of each period, what is the present value of the cash flow stream? Suppose you put $100 into a savings account today, the account pays an interest rate of 6 percent p.a. ‘compounded semi-annually, and you withdraw $100 after six months. Thereafter, you make no addi- tional deposits or withdrawals, What would your ending balance be twenty years after the initial $100 deposit was made? ‘The Bushes have asked for your help in planning for the college education of their second child ‘They expect that he will start college fifteen years from today. At that time they would like to have on deposit sufficient funds to make quarterly withdrawals of $2,500 per quarter to pay for college costs. Because college will last four years, there will be a total of sixteen quarterly withdrawals, with the first ‘one to be made on the day Jeb starts college. They plan to accumulate the necessary funds by making quarterly deposits into an account that pays 5 percent, compounded quarterly, There is, however, one complication. Their first child, George, will start college twelve years from today. Due to the gencros- ity of proud grandparents, they already have sufficient funds to pay for most of George’s college costs However, they estimate that they will not be able to make any deposits toward Jeb’s education while George is in college due to the high cost of pizza. Thus they will only be able to make a total of forty eight quarterly deposits into Jeb’s college account, with the first deposit one quarter from today and the last deposit on the day George starts college. What should be the amount of these quarterly deposits? You have just taken out an installment loan for $100,000. Assume that the loan will be repaid in twelve equal monthly installments of $9,456, and that the first payment will be due one month from today How much of your third monthly payment will go toward the repayment of principal? ‘Acommercial loan is made for 11 years at a9 percent interest rate. If equal annual payments are made at the end of each year, what annual payment is required to amortize an initial loan of $6,300,000? (Round your answer to the nearest $1) Time Value of Money: Advanced Topics 223