CHAPTER 2

TIME VALUE OF MONEY

“Time is more value than money. You can get more money but you cannot get more time.”
― Jim Rohn.
After studying this chapter, students should be able:
 To understand the importance of time value of money concept in finance.
 To understand the concept of present value and future value concept.
 To calculate both the future value and the present value of a mixed stream of cash flows.
 To understand the concept of present value and future value of annuities.
 To compute equal monthly installments (EMIs).
 To understand the differences between nominal interest rate, effective interest rate (EAR)
and annual percentage rate (APR).

The basic idea of time value of money is that a taka is worth more today than a taka tomorrow
since a taka received today can be invested to earn interest. After all, you should receive some
compensation for foregoing spending. For instance, you can invest your 1 taka for one year at a
12% annual interest rate and accumulate 1.12 taka at the end of the year. You can say that the
future value of the taka is 1.12 given a 12% interest rate and a one-year period. It follows that
the present value of the 1.12 taka you expect to receive in one year is only 1 taka. It is a very
important concept in financial management which can be used to compare investment
alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. In
finance, the time value of money concept is used to measure and evaluate many business and
financial transactions, including:
 Investment analysis
 Capital budgeting decisions
 Stocks, bonds and other securities
 Long-term leases\
 Long-term capital assets
 Accounts receivable
 Accounts payable
 Pensions and retirement plans
 Mergers and acquisitions
 Asset depreciation
 Working capital management.
It is important for any business graduates to feel comfortable with techniques for evaluating
financial transactions using time value of money techniques.
A key concept of Time Value Money is that a single sum of money or a series of equal, evenly
spaced payments or receipts promised in the future can be converted to an equivalent value
today. Conversely, you can determine the value to which a single sum or a series of future
payments will grow to at some future date.
There are five variables every time value of money problem has. They are: Interest Rate,
Number of Periods, Payments, Present Value, and Future Value. In many cases, the number of
period could be just one when it says interest rate is compounded annually and one of these other
variables will be equal to zero. So the problem will have only four variables while you will be
given the values of all but one of these, and it is the missing value for which you will be solving.
Identify the Variables
The first thing one should do is to be able to identify the variables that you have been given, and
the one that you are looking for. Once you understand what is it that you need to solve for then
you could find the right equation and plug the given variables.
Present Value (PV)
Any value that occurs at the beginning of the problem is a Present Value. It is an amount today
that is equivalent to a future payment, or series of payments, that has been discounted by an
appropriate interest rate. The future amount can be a single sum that will be received at the end
of the last period, as a series of equally spaced payments (an annuity), or both. Since money has
time value, the present value of a promised future amount is worth less the longer you have to
wait to receive it. Usually, when a present value is given, it will be surrounded by words
indicating that an investment happens today.
Future Value (FV)
Future Value is the amount of money that an investment with a fixed, compounded interest rate
will grow to by some future date. The investment can be a single sum deposited at the beginning
of the first period, a series of equally spaced payments (an annuity), or both. Since money has
time value, we naturally expect the future value to be greater than the present value. The
difference between the two depends on the number of compounding periods involved and the
going interest rate. The future value is usually the last cash flow.
Interest Rate (r)
Interest is a charge for borrowing money, usually stated as a percentage of the amount borrowed
over a specific period of time. It is actually kind of the growth rate of your money over the life of
the investment. Simple interest is computed only on the original amount borrowed. It is the
return on that principal for one time period. In contrast, compound interest is calculated each
period on the original amount borrowed plus all unpaid interest accumulated to date. Compound
interest is always assumed in TVM problems.
Annuity Payment (Pmt)
An annuity payment is a series of two or more equal payments that occur at regular time
intervals. In TVM applications, payments must represent all outflows (negative amount) or all
inflows (positive amount).
Number of Periods (t)
The number of periods is the total length of time that the investment will be held. Periods are
evenly spaced intervals of time. They are intentionally not stated in years since each interval
must correspond to a compounding period for a single amount or a payment period for an
annuity. Typically, it is given as a number of years, though it will often need to be adjusted to
some other time scale. For example, if you are told that the investment pays interest quarterly,
which means four times per year then you must adjust it accordingly so that it reflects the total
number of quarterly time periods. It could be semis, quarterly, monthly, weekly, or daily.
Now try to understand how present value is related to future value, interest rate, number of
periods, and the annuity payment.

Number of compounding (n) in a year

The variable t in Time Value of Money formulas represents the number of years. The interest
rate and number of years must both be adjusted to reflect the number of compounding periods, n
per year before using them in TVM formulas.  For example, if you borrow Tk. 1,000 for 2 years
at 12% interest compounded quarterly, you must divide the interest rate by 4 to obtain rate of
interest per period (r = 3%).  You must multiply the number of years by 4 to obtain the total
number of periods will be 8.
Here, n represents the number of compounding in one year.

Here, Compounded annually, n = 1

Compounded Semi-annually, n = 2
Compounded quarterly, n = 4
Compounded monthly, n = 12
Compounded weekly, n = 52
Compounded daily, n = 365.

Relationships among variables

PV is positively related to FV – This simply means that to achieve a higher future value you
must invest more today, all other things being equal. So the future value is always bigger than
the present value.
PV is inversely related to the interest rate – The higher the interest rate, the lower the present
value. Higher interest rates mean that your money grows more quickly. Therefore, if you can
earn a higher interest rate, you can invest less today to reach a particular future value. On the
other hand, the lower the interest rate, the more you will have to invest to meet your goal which
simply means a higher PV.
PV is inversely related to the number of periods – The longer period you invest, the less you
need to invest today, all other things being equal. On the contrary, shorter time periods require
larger initial investments.
PV is positively related to annuity payment – The higher the annuity payment, the higher the
present value, all other things being equal.
Here is an interesting analogy that may help you to identify the relationships between these
variables:
Think of the time value of problem as a road trip. The present value is your starting point, and
the future value is your final destination. The number of periods is the total distance to be
travelled, and the interest rate is the average speed that you will be travelling.

Two concepts of interest: Simple and Compound

Generally, there are two concepts of interest: simple interest and compound interest. Simple
interest refers to situations when interest is earned on a principal only. It assumes the investor
has remitted or withdrawn the interest that she is entitled to receive. On the other hand,
compound interest describes the situation the interest is earned on the original principal amount
as well as any interest earned that accumulated with the principal. Compound and simple interest
differs on one principle the simple interest won’t earn interest on interest whereas compound
interest does earn interest on interest along with the principal. On the other hand, the continuous
compound interest counts on interest earned on principal daily and also counts the interest on
that interest earned principle compounded daily. Continuous Compounding happens when
interest is charged against principle and compounds continuously, that is the interest is
continuously added to principle to be charged interest again. Continuous Compounding can be
used to determine the future value of a current amount when interest is compounded
continuously.

Here in the below chart you could see the expected return of 1 taka which earns 12% annually
what should be the expected return on various time line at simple, compound and continuous
compound interest rate.

Concepts of Interest
Here in the chart Interest rate (12%) Year 1 Year 10 Year 50

you could see the Simple 1.12 2.20 7.00

expected return of Compound 1.12 3.105 289.00

1 taka which earns Continuous compound 1.127 3.319 403.031
12% annually what
should be the 500
expected return on
various time line at 400
Simple
simple, compound 300
and continuous Compound
compound interest 200
rate. Continuous
100
compound
0
Year 1 Year 10 Year 50

Graph: 2.1
Problem 2.1: If you deposit 10,000 taka in a bank account that earns 12% simple interest for 5
years then how much money would you have after that period?
Solution: The equation for simple interest rate is quite straightforward.
FV using simple interest rate = Principal + Principal x interest rate x time or, P+P x r x t.
So, you get 10,000 + 10,000 x 0.12 x 5= 10,000 + 6,000 = 16,000 taka.
Calculating the Future Value using compound interest rate:
If you were to invest a certain amount of taka today, it would grow to a larger value depending
on the interest rate you are earning along with the time period you have invested. The simple
formula for calculating the future value of an amount of money is:

Future value (FV) = Present value (PV) + [Present value (PV) x Interest rate(r)] for 1 year.

However, if the investment is for two years then

FV = PV + [PV*r] + {[PV + (PV*r)]*r}

Or, FV = PV (1 + r + r + r2) [ 12 + 2.1.r + r2 = (1+r)2]

Or, FV = PV (1+r)2 for two years.

So the generalized equation for the future value formula will be:

Future value = present value * (1 + interest rate) time

Or, FV = PV (1+ r)t

So if we try to solve the problem 2.1 using compound interest rate then the expected return
would be:

FV = 10,000 (1+ .12)5 = 17,623.42 taka.

You could see the difference of 1,623.42 taka is due to earning interest on interest. The number
looks astronomical once you use a longer time period like the graph 2.1 has shown above.

Problem 2.2: If you invest 100,000 taka at 17% compounded annually for the next 30 years how
much money would you have after 30 years?
Solution: 100,000(1+.17)30 = 1,11,06,465 taka or one crore eleven lac six thousand four hundred
sixty five taka.
Wow! You are now a member of crore-poti club but hold on, not yet! You gotta wait thirty years
and by then you will find lots of your known friends are also the member of that elite club which
may not be elite any more after thirty years due to the application of the time value of money
concept.
What you found above was the future value of lump sums which is a single cash flow where you
have received 17% interest rate which was compounded annually. How about if it was
compounded monthly or quarterly? How about if the interest rate was not 17% all along the 30
year period?

Problem 2.3: If you invest 100,000 taka at 17% for the next 30 years how much money would
you have after 30 years if the interest is compounded monthly?

Solution:
txn
r
( )
FV = PV 1+
n

Where, n is the number of compounding in a year.

FV = 100,000 (1+ .17/12)(30x12) = 1,58,25,578 taka or one crore fifty eight lac twenty five
thousand five hundred and seventy eight taka.

Now how about if the same amount of money is being invested continuously compounded for 30
years at 17%?

FV =Pert
Where, P = principal amount (Initial investment)
r = annual interest rate (as a decimal)
t = number of years.

So the amount after 30 years if invested at 17% annually which is continuously compounded
would be:

FV = 100,000 e (0.17 x 30)

= 1,64,02,190.73 taka.

Problem 2.4: If you invest 100,000 taka which earned you 12% in year one, 18% in year two,
and 8% in year three then how much money would you have at the end of year 3?
Solution: FV = PV(1 + r1)(1+r2)(1+r3)
So, FV = 100,000(1+.12)(1+.18)(1+.08))
Or FV = 142,732.8 taka.

Calculating the Present Value using the compound interest rate

Suppose that you want to buy a reconditioned car in five years. You calculated that you need 20
lac taka for a 2012 Nissan Bluebird which you expect to own after five years. If you can earn
12% interest per year on a certificate of deposit (CD) for the next 5 years, then how much money
you would need to invest today in order to meet your dream of owning that car?

In this case you know that the future value is 20 lac and the interest rate and time period is given.
You can derive an equation by just twisting the future value equation.
If FV = PV (1 + r)t then we can rewrite,

FV
PV =
( 1+ r )t

2000000
PV =
( 1+ 0.12 )5

= 1,134,854 taka which simple means today’s eleven lac thirty four thousand eight
hundred and fifty four taka is equivalent to twenty lac after five years if you are earning twelve
percent interest annually.

Problem 2.5: If you are offered 100 taka today or 1000 taka 20 years from today, which one you
would prefer to accept if the interest you can earn is 12% annually?

Solution: You can answer it two ways. Either find the present value of 1000 taka or the future
value of 100 taka after 20 years earning12% annual interest. Here we will solve both ways just to
check if we are doing it right.

FV = 100(1+.12)20 = 964.62 taka

Or, PV = 1000/(1+.12)20 = 103.66 taka.

Both ways you find taking 1000 taka after 20 years is a better option since 1000 taka at 12%
interest rate is worth more than hundred taka that is offered today or by depositing this 100 taka
for the next 20 years at 12% interest rate will bring us 964.62 taka which is below 1000 taka. So
both ways you must reach at the same conclusion.
Problem 2.6: If you deposited in a bank a certain amount of money that earned you 8% interest
annually and after 10 years you have received 5 million taka then how much did you deposit?
How about if you could earn 12% interest annually?
Solution:

FV
PV =
( 1+ r )t

5000000
PV =
( 1+ 0.08 )10

= 2,315,967 taka.

Again if you could earn 12%, then

5000000
PV =
( 1+ 0.12 )10

=1,609,866 taka.
Interest rates and the number of periods must always agree as to the length of a time period
which means if the question asks you to compound interest monthly, then your number of
periods must be measured in months. Similarly, if you are told to compound semi-annually (2),
quarterly (4), weekly (52), or even daily (365) then you need to adjust accordingly. So when you
solve the problem 2.6 using compounding monthly instead annually then you must divide
interest rate r by 12 and multiply t by 12 as well.

So problem 2.6 using monthly compounding would be:

PV = 5,000,000(1+.08/12) – (10x12)
= 2,252,617.3 taka.
Here you could see when you are earning the same interest rate but compounding more
frequently you are needed to deposit less to get the same future value amount.

Finding the Interest Rate

Sometimes you will have to calculate the interest rate, r which you are earning or paying when
you know the PV, FV, and the number of years; t.
So far you have calculated the future value and the present value of a lump sum cash flows.
However, in many cases you may need to solve for the interest rate which you could find using
the same basic time value of money formula.

FV = PV (1+ r)t
Or, (1+r)t = FV/PV
Or, (1+r) (t/t) = (FV/PV) (1/t)
So,
r = (FV/PV)(1/t) – 1

Problem 2.7: If you want to deposit 10,000 taka and you are looking to get the highest interest
rate from the bank. Now you visited three banks where one offers 12% annual interest rate,
another one 5 years double your money and the last one 8 years triple your money. Where would
you deposit your money and why?

Solution:
r = (FV/PV)(1/t) – 1
Since, you know the interest rate of first bank, all you need to find the rate for the other two
banks.
For the second bank that doubles your money in 5 years the interest rate will be:
r = (20000/10000) (1/5) – 1
= 1.1486 – 1
= 14.86%
If you want to triple your money in 8 years the interest rate will be:
r = (30000/10000) (1/8) – 1
= 1.1472 – 1 = 14.72%
So you will be better off putting your money in the second bank which doubles your money after
5 years since you are earning the highest interest rate of 14.86% among the three banks.
Finding the Time periods

Solving for t answers the question, “How long will it take to double/triple or quadruple or any
amount you intend to have in the future knowing how much you are depositing today?” For
example, you may want to know how long you have to wait to double or triple your investment
at a certain rate.

To find the formula for t, you need to use a little algebra and have some basic knowledge of
logarithms. Again we use the basic FV formula to derive the equation for t.

FV = PV (1+ r) t
Or, (1+ r) t = FV/PV
Or, ln( 1+r) t = ln(FV/PV)
Or, tln(1+r) = ln(FV/PV).

So,

ln ( FV /PV )
t=
ln ( 1+r )

Problem 2.8: If you want to invest 5000 taka today at an annual interest rate of 11%, how long
do you have to wait to receive 20,000 taka?

Solution:

ln ( FV /PV )
t=
ln ( 1+r )

Or, t = ln(20,000/5,000)
ln(1+.11)
Or, t = 1.38629/0.10436
Or, t = 13.283 years.

So you have to wait 13.283 years to receive 20,000 taka when you invest 5,000 taka today at
11% annual interest rate. In other words, it could be said at 11% annual interest rate anyone can
quadruple their savings in 13.283 years.
Rule of 72:

The Rule of 72 is often used to approximate how long it will take to double your money at a
particular annual interest rate. It could also be used to find the annual interest rate if you know
the number of years you have to wait to double your money. The Rule of 72 is a quick and
simple technique for estimating one of two things:
1. the time it takes for a single amount of money to double with a known interest rate, or
2. the rate of interest you need to earn for an amount to double within a known time period.
It is rather a pretty simple equation: Here’s the formula:
Years to double = 72 / Interest Rate

This formula is useful for financial estimates and understanding the nature of compound interest.
Examples:
 At 6% interest, your money takes 72/6 or 12 years to double.
 To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
 If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
 If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy
doubles in 18 years. Given the speed at which technology develops, shaving years off your
growth time could be very important.

Now redo the problem 2.8 to see if the rule of 72 and the previous derived equation for t varies
significantly. Even though we use rule of 72 to double the investment but we can also check the
solution of 2.8 here and compare the outcome.
According to rule of 72 at the interest rate of 11%
Years to double your money = 72 divided by 11
= 6.545 years.
But the problem 2.8 was the money became quadruple which means 5,000 taka became 20,000
taka which is 4 times. So it would take twice as long to double again. That is, it would take 6.545
times 2 = 13.09 years which is pretty close to the exact 13.283 years. So it is not an exact figure
but to get an idea of approximation. It is a useful tool which is pretty easy to figure out.

Finding Present value dealing with multiple, uneven cash flows

So far we have solved for one lump sum of money but in real life you may encounter a different
return at different times. The key to finding the present value of multiple, uneven cash flows are
to compound each cash flow separately for the appropriate number of time periods and the
earned interest rate. For example, if you invest in a project where you earn 15,000 taka in year
one, 20,000 taka in year two, and 25,000 taka in year three when the interest rate was 12%. So to
solve it we have to bring each cash flow to present value by discounting it with the 12% interest
along with the time periods of 1 year, 2 year, and 3 year. So 15,000/(1+.12) + 20,000(1+.12) 2 +
25,000/(1+.12)3 = 13,392.86 + 15,943.88 + 17,794.51 = 47,131.25 taka.

Problem 2.9: What is the present value of receiving 50,000 taka in one year, 75,000 taka in two
years, and 100,000 taka in three years if the interest rate is 13.5%?

Solution:
Present value of 50,000 taka is 50,000/ (1+.135) = 44,052.86 taka
Present value of 75,000 taka is 75,000/ (1+.135)2= 58,219.64 taka
Present value of 100,000 taka is 100,000/ (1+.135)3 = 68,393.11 taka

So the present value of the series of cash flows is simply their combined present value:
Total PV = 44,052.86 + 58,219.64 + 68,393.11 = 1,70,665.62 taka.
Annuities
An annuity is a series of equal payments (inflows or outflows) for a certain number of time
periods. We find the uses of annuities on home mortgages, bonds, consumer loans, life insurance
contracts, lottery pay outs, rents and so on. Simply speaking, if you are paying or receiving the
same amount of money every month or every year or whatever time frame, then you have an
annuity.

There are two types of annuities: an ordinary annuity and an annuity due.

An ordinary annuity is one where the payments are made at the end of each time period
(sometimes, it is also called deferred annuity) and the annuity due is one where the payments
are made at the beginning of each time period. An example of an ordinary annuity would be a
bond that pays interest on the last day of the month.
For example, if you are to pay 20,000 taka per month at the end of every month for five years,
subject to 15% interest, you would be paying an ordinary annuity. This is an ordinary annuity
because the same cash flows occur at the end of each equal period. If those cash flows occurred
at the beginning of each month – 20,000 taka per month on the 1 st date of the month then it
would be regarded as an annuity due. An example of annuity due would be a mortgage payment
or house rent which is usually due on the first day of the month.
It is important to note that all things being equal an annuity due will hold greater value than an
ordinary annuity because the payments accrue an extra period of interest (due to immediate
investment rather than deferred investment).

Present value of an ordinary annuity and annuity due

If you would like to determine today's value of a series of future payments, you need to use the
formula that calculates the present value of an ordinary annuity. This is the formula you would
use as part of a bond pricing calculation. The PV of ordinary annuity calculates the present value
of the coupon payments that you will receive in the future.

The simple logic of present value of an ordinary annuity is that receiving a series of payment of
1,000 taka at different period of time is less today than receiving a lump sum cash flow of 5,000
taka today. This is because if you could receive those payments today, you could have invested it
and received an additional return.
Using this example, and assuming an interest rate of 14%, the PV of an annuity that pays 1,000
taka per year for five years is: (1,000*[1–(1+0.14)–5/0.14]=3,433.08 taka. This means that if you
could get a return on your invested funds of 14% per year, providing an annuity of 1,000 taka per
year would be worth 1566.92 taka (5,000 – 3433.08) less to the issuer than giving a lump sum.
We could see it by drawing a diagram which shows how much would you have at the end of
each period. Like the one we did above we can find the future value of each payment and add it
up to verify our answer.
0 1 2 3 4 5

1000 1000 1000 1000 1000

 1000(1+.14) – 1 = 877.19
1000(1+.14) – 2 = 769.46
1000(1+.14) – 3 = 674.97
1000(1+.14) – 4 = 592.08
1000(1+.14) – 5 = 519.36

= 3433.08

So the Present value of this ordinary annuity is 3433.08 taka.

Let’s find the value of this ordinary annuity using a formula.

PVOrdinary annuity =
r −txn
{1−(1+ ) }
n
payment
r
n
= 1000{1 – (1+ 0.14)-5}
0.14
= 3433.08 taka

Note: Here the number of compounding, n is 1 which means compounded once in a year.

For the present value of an annuity due formula, you need to discount the formula one period
forward as the payments are held for a lesser amount of time. When calculating the present
value, you should assume that the first payment is made today.

You could use this formula for calculating the present value of your future rent payments as
specified in a lease you sign with your landlord. Let's say that you make your first rent payment
at the beginning of the year and are evaluating the present value of your year lease on that same
day. Your present value calculation would work as follows:

0 1 2 3 4 5

1000 1000 1000 1000 1000

1000(1+.14) – 0 = 1000
1000(1+.14) – 1 = 877.19
1000(1+.14) – 2 = 769.46
1000(1+.14) – 3 = 674.97
1000(1+.14) – 4 = 592.08
= 3913.71
So the Present value of this annuity due is 3913.71 taka.

Note that when payments are made at the beginning of the period, each amount is held for longer
at the end of the period. For example, if 1,000 taka was invested on January 1st rather than
December 31st of each year, the last payment before you value your investment at the end of five
years (on December 31st) would have been made a year prior (January 1st) rather than the same
day on which it is valued. The present value of an annuity due formula would then read:

PVannuity Due =

r −txn r
{1−(1+ ) }(1+ )
n n
payment
r
n

Now let’s plug the number from the above example to see if you get the right answer.

PVannuity Due = 1000{1-(1+.14)-5}(1+.14)

0.14
= 3913.71 taka.

Present value of an annuity is basically the sum of all of the annuity’s payments. Say you are
paying 100 taka every year for 3 years when the interest rate is 10%. Now, what is the present
value of this annuity?

PVA = Pmt/ (1+r) + Pmt/ (1+r) 2 + Pmt/ (1+r) 3

= 100/(1+0.1) + 100/(1+0.1)2 + 100/(1+0.1)3
= 90.90 + 82.64 +75.13
= 248.67 taka.

So we can simplify the above equation by rearranging it:

PVA = Pmt (1+r) –1 + Pmt (1+r)–2 + Pmt (1+r) –3

If we generalized it for any number of periods:

PVA = Pmt (1+r) –1 + Pmt (1+r) –2 + Pmt (1+r) –3 + ........+ Pmt (1+r) –t

If the payment is made in months or compounded more than once then interest payments must be
adjusted accordingly. So then the equation must reflect the changed compounding.

PVA = Pmt (1+r/n)–1.n + Pmt (1+r/n) –2.n + Pmt (1+r/n) –3.n + ........+ Pmt (1+r/n) –t.n

Factoring Pmt and using summation we obtain the present value of an annuity formula:
 r −txn
payment∗{1−(1+ ) }
n
PV of an annuity =
r
n
Problem 2.10: If you want to borrow 50% of 20 lac taka for financing a car from HSBC who
charges 16% interest annually and to be paid over 4 years what would be your monthly payment
(EMI = Equal Monthly Installment)? How much total interest did you pay? What was the first
month interest and principal that you have paid?
Solution:
Here PVA = 10 lac taka, Year, t = 4, Interest rate, r = 16%, Compounding in a year, n = 12 and
the monthly payment (Pmt) =?
10,00,000 = pmt*{1– (1+0.16/12) –(4*12)}
0.16/12
10,00,000 = Pmt*{1– (1.0133) –48}
0.0133
Pmt = 1000000/ 35.28547 = 28,340 taka per month. This amount is the EMI.

Total money paid in 4 years would be: 28340 x 48 = 1,360,320 taka and borrowed amount was
1,000,000 taka. So the total interest paid was 1,360,320 – 1,000,000 = 360,320 taka. Since you
paid 28,340 taka in first month your interest deduction would be 1,000,000 taka times 1 month
interest which is .16/12 = 1.3333%. So the interest would be 13,333 taka and the principal
amount would be the rest amount which is 28,340 – 13,333 = 15,007 taka.

Problem 2.11: Vertex Corporation has just leased a machine on an installment contract. The
contract calls for payments of 50,000 taka every quarter for 8 years but now wondering what is
the present value of this contract if it counts the discount rate at 15%?
Solution:
PVA = 50,000{1– (1+0.15/4) –(8x4)
(0.15/4)
= 922,827.50 taka.

Problem 2.12: You want to buy an apartment which costs 7,000,000 taka and you want to
finance 70% of it from a bank which is charging 9% interest which needs to be repaid in equal
monthly installments for 20 years. What is your monthly payment? How much interest will you
pay altogether and from your first payment what is your interest amount and how much principal
is deducted? How much do you owe to the bank after making the first month payment?
Solution:
Periodic payment when PVA is known:
Pmt = PVA/ {1 – (1+ r/n) –txn}
( r/n)
Pmt = (4,900,000) / { 1– (1+ 0.09/12)(–20x12)} [ 70% of 70 lac is 49 lac]
(0.09/12)
= (4,900,000)/{1— (1.0075) – 240}
(0.0075)
 = (4,900,000/111.145)
= 44,086.57 taka.

So, monthly payment will be 44,086.57 taka. In total, you will make 240 monthly equal
payments of 44,086.57 if the bank charges annual interest rate of 9%.
Since you need to make 44,086.57 taka monthly payment for 240 months which means your total
payment will be 10,580,777.20 taka. So deducting the borrowed money you will pay
5,680,777.24 taka as interest.
In your first monthly payment you will deposit 44,086.57 taka as EMI whereas at 9% annual
interest rate (0.09/12 = 0.0075) the interest you will have to pay from the borrowed 49 lac taka
would be:
4,900,000 x 0.0075 = 36,750 taka. So the principal deduction would be 44,086.57 – 36,750 =
7,336.57 taka which means you still owe 4,892,663.43 taka to the bank after making first
payment. [ 4,900,000 – 7,336.57 = 4,892,663.43]

Problem 2.13: Mr. Ryan could save 20,00 taka per month and dreams of buying a brand new
Tata Nano which costs 500,000 taka. He went to the bank and asked if he could finance his
dream car for 2 years but the manager refused to finance if for two years but offered to finance
for 3 years at 18% annual interest rate. How did the Manager come to that conclusion?

Solution:

Pmt = 500,000/{1– (1 + 0.18/12) – 2x12} = 24,962.05 taka.

(0.18/12)
So the monthly payment (EMI) will be 24,962.05 taka. Since Mr. Ryan could save only 20,000
taka it is not possible for the Manager to finance the car for two years. But for three years the
payment would be 18,076.20 taka. So the bank Manager would be interested to finance it for
three years. Can you check if the EMI of 18,076.20 taka correct for 3 years financing at 18% for
the 500,000 taka borrowed fund?

Future value of an ordinary annuity and annuity due

The future value of an annuity measures how much you would have in the future given a
specified rate of return or discount rate. The future cash flows of the annuity grow at the discount
rate and the higher the discount rate, the higher the future value of the annuity.

If you know how much you can invest per period for a certain time period, the future value of an
ordinary annuity formula is useful for finding out how much you would have in the future by
investing at your given interest rate. If you are making payments on a loan, the future value is
also useful for determining the total cost of the loan.

The simple logic of future value of ordinary annuity is that providing a lump sum of 5,000 taka
today costs more than providing a cash flow of 1,000 taka per year for the next five years. This is
because if you provide the lump sum today, you could have invested it and received an
additional return.
Using this example, and assuming an interest rate of 14%, the future value of an annuity that
pays 1,000 taka per year for five years is: (1,000*[(1+0.14)5-1]/(0.14)=6,610.10 taka). It means
that if you could get a return on your invested funds of 14% per year, providing an annuity of
1,000 taka per year would be worth 1610.1 taka (6,610.1-5,000) more to the issuer than giving a
lump sum.
You could see it by drawing a diagram which shows how much would you have at the end of
each period. Like the one you did above you can find the future value of each payment and add it
up to verify our answer.

0 1 2 3 4 5

1000 1000 1000 1000 1000

1000(1+.14)0 = 1000.00
1000(1+.14)1 = 1140.00
1000(1+.14)2 = 1299.60
1000(1+.14)3 = 1481.54
1000(1+.14)4 = 1688.96
= 6610.10
So the future value of this ordinary annuity is 6610.10 taka.

You can see that the future value of an ordinary annuity is simple the summation of all future
value which is:

FVA = Pmt*(1+r)0 + Pmt*(1+r)1 + Pmt*(1+r)2 + Pmt*(1+r)3 + ...........Pmt*(1+r)n

Factoring Pmt and using summation we obtain the future value of an ordinary annuity formula:

FVA = Pmt*{(1+ r/n)t*n – 1}

(r/n)

How about the value of the same future value of the above annuity if it is an annuity due? Since
in an annuity due the payment is made at the beginning of the period so that period will start
earning interest and thus basically it will differ just the one payment which needs to be
discounted on the basis of that time period. For example, the above value of that ordinary annuity
was 6610.1 taka but for annuity due it would be:

0 1 2 3 4 5

1000 1000 1000 1000 1000

1000(1+.14)1=1140
 1000(1+.14)2=1299
1000(1+.14)3=1481.54
1000(1+.14)4=1688.96
1000(1+.14)5=1925.41
= 7534.91

So the future value of this annuity due is 7,534.91 taka.

Note that when payments are made at the beginning of the period, each amount is held for longer
at the end of the period. For example, if the 1,000 taka was invested on January 1st rather than
December 31st of each year, the last payment before you value your investment at the end of five
years (on December 31st) would have been made a year prior (January 1st) rather than the same
day on which it is valued. The future value of annuity formula would then read:

FVannuity Due = Pmt*{(1+ r/n)t*n – 1}*( 1+ r/n)

r/n
Now let’s verify if you have got the above number of the future value of annuity due is right
using the PV of annuity due equation.
PVannuity Due = 1000* {(1+0.14)5*1- 1}*(1+.14)
.14
= 7,535 taka.

The future value of an annuity formula is used to calculate what the value at a future date would
be for a series of periodic payments.

The future value of an annuity formula assumes that:

1. The rate does not change.

2. The first payment is one period away.
3. The periodic payment does not change.

If the rate or periodic payment does change, then the sum of the future value of each individual
cash flow would need to be calculated to determine the future value of the annuity. If the first
cash flow, or payment, is made immediately, the future value of annuity due formula would be
used.

Problem 2.14: If you are 25 year old and you would like to retire at the age of 60 and planning to
have a retirement fund which will have 5 crore taka at that time. Now you contacted a bank and
asked them that you are interested to open a savings scheme which the bank is offering 12%
annual interest. Now how much money do you need to deposit every month to have 5 crore taka
at the age of 60?

Solution:
Pmt = FVA/{(1+ r/n) t*n – 1}
(r/n)
Here, FVA = 50,000,000 taka, Interest rate, r is .12, Time, t is 35 years, and the compounding
period , n is 12. We need to find the monthly payment.

Pmt = 5,00,00,000/ {(1+.12/12)35*12 –1}

.12/12
= 7,775 taka per month.
Problem 2.15: If you want to take your family to a vacation trip to Nepal after 3 years from
today and you calculated you would need 150,000 taka by then to pay for the trip. Now you are
interested to open a savings scheme in a bank which will pay you 14% annual interest then how
much money you need to deposit per month to have 150,000 taka after 3 years?
Solution;

Pmt = FVA/{(1+ r/n) t*n – 1}

r/n

Here FVA = 150,000 taka, Interest rate, r = 0.14, Time, t = 3 years and n = 12
So the Payment would be = 150,000 /{(1 + .14/12)3*12 –1}
.14/12
= 3,376.64 taka per month.
Hence you will make a monthly payment of 3,376.65 taka for the next 36 months which makes a
total payment of 121,559.2 taka and thus earned an interest of (150,000 – 121,559.2) = 28,440.80
taka.
Present value of a growing annuity
The present value of a growing annuity formula calculates the present day value of a series of
future periodic payments that grow at a proportionate rate. A growing annuity may sometimes be
referred to as an increasing annuity. A simple example of a growing annuity would be an
individual who receives Tk.100 the first year and successive payments increase by 10% per year
for a total of three years. This would be a receipt of Tk.100, Tk.110, and Tk.121, respectively.
The present value of a growing annuity formula relies on the concept of time value of money.
The premise to this concept is that a specific quantity of money is worth more today than at a
future time.

Like all financial formulas that involve a rate, it is important to correlate the rate per period to
the number of periods in the present value of a growing annuity formula. If the payments are
monthly, then the rate would need to be the monthly rate.
p
PV of a growing annuity= ¿
r−g
Here P = first payment, r = interest rate, g = growth rate, and t = number of year.

Problem 2.16: Suppose you have just won the first prize in a lottery. The lottery offers you two
possibilities for receiving your prize. The first possibility is to receive a payment of 10,000 taka
at the end of the year, and then, for the next 15 years this payment will be repeated, but it will
grow at a rate of 5%.  The interest rate is 12% during the entire period. The second possibility is
to receive 100,000 taka right now. Which one out of the two possibilities would you take?
Solution:
You want to compare the PV of the growing annuity to the PV of receiving 100,000 taka right
now (which is, obviously just Tk.100,000). So, here are the numbers:
P = 10,000
r = 0.12
g = 0.05 , t = 16
10,000
PV of a growing annuity= ¿
( 0.12−0.05 )

= Tk.91,989.41 < Tk.100,000, therefore, you would prefer to

be paid out right now.
Future value of a growing annuity
The formula for the future value of a growing annuity is used to calculate the future amount of a
series of cash flows, or payments, that grow at a proportionate rate. A growing annuity may
sometimes be referred to as an increasing annuity.

FV of a growing annuity=P ⌊ (1+r )t−¿ ¿

Problem 2.17: If an employee saves 20000 taka per year which increases by 5% every year and
earns 12% annual interest then after 10 years, how much would she have?
Solution:
FV of this growing annuity = 20000[(1+.12)10 – (1+0.05)10]
(0.12 – 0.05)
= 421,986.7 taka.

PERPETUITIES
Perpetuity is a type of annuity that receives an infinite amount of periodic payments. An annuity
is a financial instrument that pays consistent periodic payments. As with any annuity, the
perpetuity value formula sums the present value of future cash flows.

Perpetuity is a constant cash flow at regular intervals forever. The present value of perpetuity can
be written as:
c
PV of perpetuity=
r
Here c stands for coupon payment and r the is interest rate.

Remember, the future value of perpetuity is infinite.

A console is a bond that has no maturity and pays a fixed coupon. Assume that you have a 12%
coupon console bond. The value of this bond, if the interest rate is 9%, is as follows:
Value of Console Bond = 120 / .09 = 1,333.33 taka.
The value of a console will be equal to its face value (which is usually Tk. 1000) only if the
coupon rate is equal to the interest rate.

State whether each of the following statements is True (T) or False (F)

1. Time lines are used to help visualize what is happening in time value of money problems.
2. PV will always be higher than FV if the interest rate is positive.
3. The slower the cash flows come in and the higher the interest rate, the lower the present
value.
4. The present value of an uneven stream of future payments is the sum of the PVs of the
individual payments.
5. As the discount rate increases, the present value of a future sum decreases and eventually
approaches towards zero.
6. The beginning value of an account or investment in a project is known as its future value.
7. A series of payments of a constant amount for a specified number of periods is a(n) annuity.
If the payments occur at the end of each period it is a(n) ordinary annuity, while if the
payments occur at the beginning of each period it is an annuity due.
8. An annuity that goes on indefinitely is called a(n) perpetuity.
9. The EAR is always greater than or equal to the nominal rate.
10. Future value of a growing perpetuity is impossible to calculate.
11. If a bank compounds interest annually then EAR and APR should be the same.
12. The breakdown of each payment as partly interest and partly principal is developed in a loan
amortization schedule.

Answers: 1. T, 2. F, 3. T, 4. T, 5. T, 6. F, 7. T, 8. T, 9. T, 10. F, 11. T, 12. T

MULTIPLE CHOICE QUESTIONS:

1. You have 950 taka in your account today. How much will you have 5 years from now if the
account earns 8 percent compounded annually?
A) Tk. 1,341.05 B) Tk. 1,347.82 C) Tk. 1,395.86 D) Tk. 1,406.23
2. One hundred years ago, a painting sold for 125 taka. Today it sold for 36 million taka. Had
the painting been purchased by your great-grandfather and passed on to you, approximately
how much would your average annually compounded rate of return have been?
A) 9.11 percent B) 10.09 percent C) 11.88 percent D) 13.40 percent
3. What is the total present value of 50 taka received in one year, 200 taka received in two
years, and 800 taka received in six years if the discount rate is 8 percent?
 A) Tk. 482.72 B) Tk. 661.68 C) Tk. 697.25 D) Tk. 721.90
4. An account was opened with an investment of Tk. 1,000 ten years ago. The ending balance in
the account is Tk. 1,500. If interest was compounded annually, what rate was earned on the
account?
A) 1.00 percent B) 2.27 percent C) 2.99 percent D) 4.14 percent
5. You are supposed to receive Tk. 2,000 five years from now. At an interest rate of 6 percent,
what is that 2,000 taka worth today?
A) Tk. 1,494.52 B) Tk. 1,492.43 C) Tk. 1,497.91 D) Tk. 1,490.52
6. Your grandfather placed Tk. 2,000,000 in a trust fund for you. In 10 years the fund will be
worth Tk. 5,000,000. What is the rate of return on the trust fund?
A) 5.98 percent B) 8.76 percent C) 9.98 percent D) 9.60 percent
7. You need Tk.2,000 to buy a new stereo for your car. If you have Tk.800 to invest at 5 percent
compounded annually, how long will you have to wait to buy the stereo?
A) 6.58 years B) 18.78 years C) 14.58 years D) 28.78 years
8. You are going to withdraw 1,000 taka at the end of each year for the next three years from an
account that pays interest at a rate of 8 percent compounded annually. How much must be in
the account today in order for the account to reduce to a balance of zero after the last
withdrawal?
A) Tk.793.83 B) Tk.1,587.10 C) Tk.2,577.10 D) Tk.2,777.10
9. An account was opened with an investment of Tk. 1,000 ten years ago. The ending balance in
the account is Tk. 1,500. If interest paid on the account was compounded annually, how
much interest on interest was earned?
A) Tk.186 B) Tk.93 C) Tk.102 D) Tk.86
10. A given rate is quoted as 12 percent, but has an effective annual rate of 12.55 percent. What
is the rate of compounding during the year?
A) annually B) semi-annually C) monthly D) quarterly
11. At the end of each year for the next ten years you will receive cash flows of Tk. 50,000. The
initial investment is Tk. 320,000. What rate of return are you expecting from this investment?
A) 9.06 percent B) 10.43 percent C) 12.01 percent D) 11.06 percent
12. What annual percentage rate of return allows you to triple your money in 20 years?
A) 7.65 percent B) 5.98 percent C) 6.86 percent D) 5.65 percent
13. You just borrowed Tk. 26,000 for five years. The loan is an interest-only loan for five years
at 8 percent compounded annually. How much of the first payment is used to reduce the loan
principal?
A) Tk. 0 B) Tk.2,080.00 C) Tk.4,431.87 D) Tk.5,416.00
14. You agree to loan your friend Tk. 22,000 to buy a new guitar. He agrees to pay you Tk. 450 a
month for 5 years. The:
A) interest rate is 0.75% per month. C) annual percentage rate is 8.17%.
B) effective annual rate is 8.37% D) effective annual rate is 8.70%.
15. You are considering various loan offers. The loan terms are equivalent with the exception of
the interest rate. Which one of the following rates should you accept?
A) 8.75% compounded monthly C) 8.90% compounded semi-annually
B) 8.70% compounded continuously D) 8.99% compounded annually
16. A given rate is quoted as 8 percent, but has an effective annual rate of 8.33 percent. What is
the rate of compounding during the year?
A) annually B) semi-annually C) quarterly D) continuously
17. Jahed will loan you money on a "five-for-six" arrangement. That is, for every 5 taka he gives
you today, you give him 6 taka one week from now. What is the APR of this loan?
A) 410 percent B) 540 percent C) 860 percent D) 1,040 percent
18. Suppose you are evaluating two annuities. They are identical in every way, except that one is
an ordinary annuity and one is an annuity due. Assuming an interest rate of 10 percent, which
one of the following is true?
A) The ordinary annuity must have a higher present value than the annuity due.
B) The annuity due must have the same present value as the ordinary annuity.
C) The ordinary annuity must have a lower future value than the annuity due.
D) The two annuities will differ in present value by the amount of exactly one of the annuity
payments.
19. Your monthly mortgage payment on your house is Tk. 59,390. It is a 30-year mortgage at 7.8
percent compounded monthly. How much did you borrow?
A) Tk.75,00,000 B) Tk.77,50,000 C) Tk.82,50,000 D) Tk.85,50,000
20. You can afford to pay Tk.12,500 a month on a car loan. You are willing to make monthly
payments for four years at 7.9 percent. How much can you afford to borrow to buy a car?
A) Tk. 5,13,010 B) Tk.5,24,010 C) Tk.5,15,000 D) Tk.6,23,090
21. You just paid Tk. 10,000 for an annuity. The annuity will pay you Tk.1,000 a year for 12
years. What is the rate of return on this annuity?
A) 2.92% B) 3.01% C) 3.23% D) 3.92%
22. You and your family have found your dream apartment at Banani, Dhaka. The selling price is
Tk.12,000,000; you will put Tk.2,000,000 down and obtain a 30-year fixed-rate mortgage at
8.25 percent for the rest. How much interest will you pay over the life of the loan?
A) Tk.13,510,100 B) Tk.14,558,300 C) Tk.17,845,700 D) Tk.17,045,700
23. You ask your banker to loan you Tk.100,000 as a 30-year fixed-rate mortgage at 8.25 percent
compounded monthly. Your banker suggests you consider a 15-year loan at 7.75 percent
compounded monthly. What is the difference in the monthly payment between these two
loans?
A) Tk.9.26 B) Tk.54.72 C) Tk.111.57 D) Tk.190.01
24. A local consumer finance company is offering loans at an annual percentage rate of 20
percent. The interest on the loan is compounded continuously. What is the effective annual
rate?
A) 22.14 percent B) 20.84 percent C) 23.01 percent D) 26.24 percent
25. What is the effective annual rate of 12 percent compounded continuously?
A) 12.75 percent B) 12.36 percent C) 12.55 percent D) 12.15 percent
26. What is the effective annual rate of 12 percent compounded semi-annually?
A) 12.36 percent B) 12.86 percent C) 12.55 percent D) 12.16 percent
27. You are borrowing 1,500 taka at 6 percent compounded annually. You plan to pay Tk. 90 at
the end of each year on the loan. How long will it take you to repay the loan in full?
A) 9 years B) 10 years C) 11 years D) Never
28. You invest Tk.500 today. You plan on adding annual amounts Tk.500, Tk.600, and Tk.700 to
the account at the end of each of the next three years, respectively. What will your account be
worth five years from now if you earn a 7 percent rate of return?
A) Tk.2,788.91 B) Tk.2,903.14 C) Tk.2,934.86 D) Tk.2,893.13
29. Five years from now you will begin to receive cash flows of Tk.75,000 per year. These cash
flows will continue forever. If the discount rate is 6 percent, what is the present value of
these cash flows?
A) Tk.7,99,680 B) Tk.894,220 C) Tk.934,070 D) Tk.990,120
30. In order to compare equally risky investment opportunities that have interest rates reported in
different formats you should convert each rate to a(n):
A) annual nominal rate. C) monthly nominal rate.
B) effective annual rate. D) annual percentage rate.
31. A friend promises to pay you Tk. 6,000 two years from now if you loan him Tk. 5000 today.
What annual interest rate is your friend offering?
A) 8% B) 9% C) 9.5% D) 10%
32. What would be the ending amount if Tk. 500 payments were made at the end of each 6-
month period for 5 years and the account paid 6 percent compounded semiannually?
A) Tk. 5,732 B) Tk. 6,660 C) Tk. 8,772 D) Tk. 7,532
33. How much would you be willing to pay today for an investment that would return Tk. 800
each year at the end of each of the next 6 years? Assume a discount rate of 5 percent.
A) Tk. 5,200 B) Tk. 4,060 C) Tk. 8,752 D) Tk. 3,532
34. What is the present value (t = 0) of the following cash flows if the discount rate is 12
percent?

0 12% 1 2 3 4 5

| | | | | |
0 2,000 2,000 2,000 3,000 -4,000

A) Tk. 4,440.50 B) Tk. 4,080 C) Tk. 5,402.50 D) Tk. 4,004.50

35. Suppose an annuity costs Tk.40,000 and produces cash flows of Tk.10,000 over each of the following
eight years. What is the rate of return on the annuity?
A) 20% B) 16.5% C) 18.6% D) 21.2%

36. An amount of Tk. 1,500.00 is deposited in a bank paying an annual interest rate of 4.3%,
compounded quarterly. What is the balance after 6 years?
A) Tk. 1938.84 B) Tk. 1878.55 C) Tk. 2255.32 D) Tk. 1288.55

Answers: 1. C, 2. D, 3. D, 4. D, 5. A, 6. D, 7. B, 8. C, 9. D, 10. D, 11. A, 12. D, 13. A, 14. A, 15.

A, 16. D, 17. D, 18. C, 19. C, 20. A, 21. A, 22. D, 23. D, 24. A, 25. A, 26. A, 27. D, 28. D, 29. C,
30. B, 31.C, 32. A, 33. B, 34. A, 35. C, 36) A

SHORT QUESTIONS:

1. Explain what is meant by “ one taka in hand today is worth more than one taka to be received
in future”
2. What is compounding? Explain why earning “interest on interest” is called “compound
interest rate”
3. You have 10,000 taka that you plan to deposit in a bank which pays 14 percent interest
annually. How much money will you have after 6 years?
4. What is meant by the term “opportunity cost rate”?
5. What is discounting? How is it related to compounding?
6. How does the present value of an amount to be received in the future change as the time is
extended and as the interest rate increases?
7. What amount you must deposit today in a fixed deposit which pays 12.5 percent interest
annually to be a millionaire (10, 000, 00 taka) in 10 years?
8. If you invest 500,000 taka today which paid 12 percent interest annually and became
10,000,000 taka then how long was the money invested in that fixed account?
9. What is an annuity? What is the difference between an ordinary annuity and an annuity due?
10. Other things held constant, which annuity has the greater future value: an ordinary annuity
and an annuity due? Why?
11. What amount today deposited in a bank account paying 8 percent interest annually would
allow you to withdraw 100,000 taka at the end of each of the next three years?
12. What is perpetuity? What happens to the value of perpetuity when interest rates increase?
What happens when interest rates decrease?
13. What is today’s value of perpetuity of 15,000 taka per year at an annual interest rate of 12
percent?
14. If the value of perpetuity today is 6000 taka and the current interest rate is 14 percent, what
payment would you receive in perpetuity?
15. Why is semiannual compounding better than annual compounding from a saver’s point of
view? What about a borrower’s point of view?
16. Define the terms “Annual Percentage rate” or “APR”, “Effective Annual rate,” or “EAR,”
and “Nominal Interest Rate.”
17. What is a growing annuity? Explain what is growing perpetuity?

BROAD QUESTIONS:

1. Select the best alternative from the four options given below when the discount rate is 12%
that gives the highest return
a) Tk. 7,50,000 available today
b) Tk. 18,00,000 to be received after 8 years.
c) Tk. 100,000 per annum in perpetuity.
d) Tk. 30,000 per month for a year and Tk.5,00,000 at the end of the year.
2. You deposit 12,000 taka at the beginning of each of the next five years in a bank account that
pays 9 percent interest. How much will you have in your account at the end of the five-year
period? What is the difference in the future values of the 12,000 taka annuity due and the
12,000 taka ordinary annuity at a 9 percent interest rate? Why does the difference occur?
3. Assume you borrow 5 million taka from HSBC bank today to buy an apartment at an annual
interest of 16 percent which you will be paying off in five years by making monthly equal
payments. What would be your monthly installment? Set up the amortization schedule for the
preceding loan. How much of the first payment is interest, and how much is repayment of
principal? Ans: 121,520.28 taka.
4. You are 25 years old and you plan to retire after 35 years at the age of 60. You want to have
a retirement fund when you retire and the exact amount you desire to have is 1 crore (10
 million) taka. If a bank offers you 12 percent annual interest which compounds monthly then
how much should you deposit each month to be a crore-poti at the age of 60? Ans. 1554.98
taka.
5. How much will a recurring investment of 50,000 taka per annum accumulate to at the end of
30 years where the investment earns an interest rate of 12.5% per annum if compounding is
done:
a) annually b) quarterly c) monthly d) daily.
6. Your investment in the stock market of Tk. 500,000 grew to Tk. 1800,000 in 4 years. What
rate of return did you earn on that investment?
7. How many years will it take for an investment to grow from Tk. 2,000,000 to grow to Tk.
3,000,000 at 10% interest per annum?
8. You have decided to save Tk. 5,000 in a savings account at the end of each month for next 30
years. The money can be invested at an interest rate of 10% a year. How much you will be able
to save in 30 years?
9. You have decided to deposit Tk. 100,000 in a savings account at the end of each year for next
30 years of your working life. The money can be invested at an interest rate of 10% p.a. How
much you will save in 30 years from now?
10. You have decided to save Tk. 5,000 in a savings account at the beginning of each month for
next 30 years. The money can be invested at an interest rate of 10% a year. How much you will
be able to save in 30 years?
11. How much money you must have today in order to withdraw Tk. 5,000 at the end of each
month for next 30 years? Assume an interest rate of 12% p.a.
12. How much money you must have today in order to withdraw Tk. 5,000 at the beginning of
each month for next 30 years? Assume an interest rate of 12% p.a.
13. In order to have Tk. 3,000,000 after 15 years from now, how much you should save at the
end of each year at 8% interest rate p.a?
14. In order to have Tk. 10,000,000 after 15 years from now, how much you should save at the
end of each month at 8% interest rate p.a?
15. You are going to inherit Tk. 2,000,000 after 10 years. At 10% annual interest rate what is the
present value of that amount?
16. You have Tk. 1,000,000 in your bank account. How much you will be able to spend at the
end of each year for next 10 years from that account if the interest rate is 12% p.a?
17. If you take out a Tk. 1,000,000 car loan for five years at an interest of 18% p.a, how much
you will have to pay at the end of each month as installment?
18. What is the present value of the investment that will pay you Tk. 100,000 at the end of each
year for next 30 years? Assume interest rate will be 12% per annum.
19. What is the present value of an investment that will give you Tk. 60,000 at the end of each
year forever at 12% required return per annum?
20. Your friend wants you to invest in his business. He told you that he will give you Tk.
100,000 as profit at the end of the first year. Thereafter, he promises to pay 5% more each year
forever. If your required rate of return is 12% p.a., how much should you pay for this investment
opportunity?
21. What will be the future value of Tk. 100,000 deposited today after 5 years at 10% annual
interest rate?
22. For a savings account ABC Bank pays interest 9% per annum, compounded monthly. If you
deposit Tk. 100,000 in that account, how much you will get after 15 years?
23. Mr. Shuvro Rahman decides to save once per year. His expected savings will be Tk. 100,000
for the first year and he expects to save 10% more each year thereafter. In a savings account that
has an interest of 9% per year, how much he would be able to save after 8 years.
24. Mr. Arif just offered a job Tk. 360,000 per year. He anticipated that his salary increasing by
8% every year until his retirement in 35 years. Given an interest rate of 12% per annum, what is
the present value of the job offer?
25. Your target is to have Tk. 5,000,000 as savings after 15 years. XYZ Bank has a savings
product which will give you 12% interest per annum, compounded (m) monthly. How much
money you need to deposit today in order to achieve your target in fifteen years?
26. Calculate the effective interest rate for an account yielding nominally 12% per annum,
compounded monthly.
27. How long does it take for Tk.20,000 to grow into Tk.77,244 at 10% compounded quarterly?
28. What annual interest rate would you need in order to have an ordinary annuity of Tk.750,000
per year accumulate to Tk.27,960,000 in 10 years?
29. You have deposited Tk. 5,000,000 in savings account that will pay you 6% interest per
annum forever. If you intend to keep that amount in that savings account for the rest of your life,
how much interest you will be able to withdraw per year from that account?
30. A Tk.100,000 motor cycle loan has payments of Tk.3615.20 due at the end of each month for
three years. What is the nominal interest rate?
31. Mr. Ryan Ahmed is considering taking early retirement, having saved Tk.40,000,000. Mr.
Ahmed desires to determine how many years the savings will last if Tk.4,000,000 per year is
withdrawn at the end of each year. He feels the savings can earn 10 percent per year.
32. What is the monthly rate of interest that will yield an annual effective interest rate of 12
percent?
33. An investment requires an outlay of Tk.1,000,000 today. Cash inflows from the investment
are expected to be Tk.400,000 per year at the end of years 4, 5, 6, 7, and 8. If you require a 20
percent annual rate of return on this type of investment, should the investment be undertaken?
34. Your mother is planning to retire this year. Her firm has offered her a lump sum retirement
payment of Tk.50,000 or a Tk.6,000 lifetime ordinary annuity-whichever she chooses. Your
mother is in reasonably good health and expects to live for at least 15 more years. Which option
should she choose, assuming that an 8 percent annual interest rate is appropriate to evaluate the
annuity?
35. A local bank will pay you Tk.100, 000 a year for your lifetime if you deposit Tk.2, 500,000
in a bank today. If you plan to live forever, what interest rate is the bank paying?
36. If investors receive a 6% interest rate on their bank deposits, what real interest rate will they
earn if the inflation rate over the year is a) 0%? b) 3% and c) 6%.
37. If a credit card is offering 2.5% interest per month then how much do they really charging
you?
38. To construct an amortization schedule, how do you determine the amount of the periodic
payments? Provide an example please.
39. House building society is offering 10.5% annual home loan for a maximum of 20 years. Mr.
Ahmed and his wife Mrs. Mithila is planning to buy an apartment that will cost them Tk. 52 lac.
House building society requires the couple to pay 15% down payment and the rest it will finance.
The couple is asking you to calculate the EMIs for 10 years and 20 years since there is a chance
they can afford to pay more per month. They are also asking you draw an amortization schedule
showing the interest payment and the principal components.
40. If World number one all-rounder Shakib Al Hasan signed a 15 million taka contract with a
franchise of BPL providing 3 million taka a year at the end of each year for five years whereas
Tamim Iqbal signed a 12.5 million taka contract with the same franchise which is also a five-
year contract providing 5 million taka now and 1.5 million taka a year for five years. Who is
better off if the interest rate is 12%? Ans:Sakib PV=Tk. 10814328 and Tamim PV Tk.10407164.
41. Eastern Housing Limited (EHL) is giving the potential buyers of its apartment a great deal. It
says a customer can buy an apartment which has been priced fixed at Tk. 70 lac but can buy it
for only 50 lac taka in one lump sum or just pay 10 lac taka down payment and the rest in equal
monthly installments (EMI) of 1 lac taka per month for the next five years. If the interest rate is
15% which deal a potential buyer should go for?
42. You believe you will need to have saved 50,000,000 taka for your pension fund account by
the time you retire in 40 years in order to live comfortably. If the interest rate is 11.5% per year,
how much must you save each month to reach your retirement goal?
43. Kabir & Mohit are close friends and entered into jobs recently at the same age (at an age of
25 years) and earn same amount as monthly salary. As a preparation for retirement at the age of
65, both are planning to save some money, so that they can use it for building luxury duplex
houses at Cox’s Bazar after retirement. Kabir is planning to save Tk. 100,000 at the end of each
year in a bank account until he turns 60. But, he will not take out the money immediately; rather
he will let the amount grow till his retirement.
On the other hand, Mohit is planning to save nothing for next 5 years, but after that from the 6th
year and onwards he is going to save Tk. 120,000 at the end of each year until he retires at the
age of 60 as well. After retirement, who will have more money available in the account?
(Consider an interest rate of 12% compounded annually)
44. You have decided to buy a new Toyota Camry for Tk. 4,000,000 (forty lac taka) with bank
financing. The bank is offering you a 5-year loan at 16.5% (APR) and the first loan payment is
due one-month from now.

a. Assume all loan payments are made at the end of the month. Given the interest rate on the
loan, what is your monthly payment? Ans: EMI = 98,352 taka.
b. By making fixed monthly payments on your loan, you are repaying the principle amount
over five years. This process of paying off a loan by making regular principal reductions is
called amortizing the loan. For your first monthly loan payment, what amount of your
payment goes to repaying your principle and how much to repaying your interest?
c. How much of your principle have you repaid after three months?

45. A new lottery is offered to raise money for the cancer patients where the authority is asking
potential lottery buyers to become a crore-poti (10 million) if anyone wins the jackpot. Before
you buy the lottery you need to tick one of the options how you want to be paid.

Option 1: Bangladesh government’s Treasury bonds issued in your name which, if held to
maturity, will pay Tk. 250,000 a year for 30 years, plus a final payment of Tk. 2.5 million in the
30th year (250,00030+2.5 million = Tk. 10 million). Ans: 343526.46 taka.
Option 2: Tk. 1 million cash now, Tk. 200,000 yearly payments at the beginning of the next 30
years (i.e., the first Tk. 200,000 is made in 12 months) plus a Tk. 3 million payment in the 30th
year (1 million+200,00030 +3 million = Tk. 10 million). Ans: 3875276.33 taka.
Option 3: Tk. 500,000 now, Tk. 250,000 yearly payments at the beginning of the next 28 years
(i.e., the first Tk. 250,000 is made in 12 months) plus a Tk. 2.5 million payment in the 30th year
(500,000 + 250,00028+2.5 million = Tk. 10 million). Ans: 3868549 taka.