Fin 301: Tuesday January 16, 2007.

Ch 2-1

1. Time value of money: It is now January 1, 2006, and you will need $1,000 on January
1, 2010, in 4 years, Your bank compounds interest at 8 percent annual rate.
a. How much must you deposit today to have a balance of $1,000 on January 1,
2010?
b. How much must you deposit today to have a balance of $1,000 on January 1,
2020?
c. Suppose you can deposit only $200 each January 1 from 2007 through 2010 (4
years). What interest rate, with annual compounding, must you earn to end up
with $1,000 on January 1, 2010?

2. What is the PV of a security that will pay $8,000 in 20 years if securities of equal risk
pay 8% annually?
FV=
I/Y=
N=
PMT=
CPT PV=

3. If you deposit your money today in an account that pays 8% annual interest, how long
will it take to double your money? (Use the rule of 72 to double check your answer)
PV=
FV=
I/Y=
PMT=
CPT N=

4. (2-19) Your client is 40 years old, and she wants to begin saving for retirement, with
the first payment to come one year from now. She can save $5,000 per year, and you
advise her to invest it in the stock market, which you expect to provide an average return
of 9% in the future.
a. If she follows your advice, how much money would she have at 65?
b. How much would she have at 70?
c. If she expects to live for 20 years in retirement if she retires at 65 and for 15 years
at 70, and her investments continue to earn the same rate, how much could she
withdraw at the end of each year after retirement at each retirement age?

5. (2-14) Find the future values of these ordinary annuities compounding occurs once a
year.
a. $400 per year for 10 years at 10 %
b. $200 per year for 5 years at 5%
c. $400 per year for 5 years at 0%
d. Reword parts a and b, assuming that they are annuities due