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TIME VALUE OF MONEY

Practice questions

Dear students,
These are some practice questions (selected from your
recommended book), relating to Time value of money that
will help you out to understand the concepts. Solve these
questions and these will help you to attempt the quizzes,
assignments, GDBs and Examinations as well.

1. Assume that it is now January 1, 2002. On January 1, 2003, you will deposit $1,000
into a savings account that pays 8 percent.
a. If the bank compounds interest annually, how much will you have in your account
on January 1, 2006?
b. What would your January 1, 2006, balance be if the bank used quarterly
compounding rather than annual compounding?
c. Suppose you deposited the $1,000 in 4 payments of $250 each on January 1 of
2003, 2004, 2005, and 2006. How much would you have in your account on
January 1, 2006, based on 8 percent annual compounding?
d. Suppose you deposited 4 equal payments in your account on January 1 of 2003,
2004, 2005, and 2006. Assuming an 8 percent interest rate, how large would each
of your payments have to be for you to obtain the same ending balance as you
calculated in part a

2. An investment pays you $100 at the end of each of the next 3 years. The investment
will then pay you $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the
end of Year 6. If the interest rate earned on the investment is 8 percent, what is its present
value? What is its future value?

3. Which amount is worth more at 14 percent, compounded annually: $1,000 in hand


today or $2,000 due in 6 years?

4. While you were a student in college, you borrowed $12,000 in student loans at an
interest rate of 9 percent, compounded annually. If you repay $1,500 per year, how long,
to the nearest year, will it take you to repay the loan?

5. The prize in last week’s Florida lottery was estimated to be worth $35 million. If you
were lucky enough to win, the state will pay you $1.75 million per year over the next 20
years. Assume that the first installment is received immediately.
a. If interest rates are 8 percent, what is the present value of the prize?
b. If interest rates are 8 percent, what is the future value after 20 years?
c. How would your answers change if the payments were received at the end of each
year?
6. Find the future value of the following annuities. The first payment in these annuities is
made at the end of Year 1; that is, they are ordinary annuities. Assume that compounding
occurs once a year.
a. $400 per year for 10 years at 10 percent.
b. $200 per year for 5 years at 5 percent.
c. $400 per year for 5 years at 0 percent.
d. Now rework parts a, b, and c assuming that payments are made at the beginning
of each year; that is, they are annuities due.

7. What is the present value of receiving $6,000 seven years from now if the nominal
discount rate is 8 percent, discounted continuously?