Time Value

of Money

1
It is now January 1, 2022, and you will need P1,000 on January 1,
2026, in 4 years. Your bank compounds interest at an 8% annual rate.
a. How much must you deposit today to have a balance of P1,000 on
January 1, 2026?
b. If you want to make four equal payments on each January 1 from
2022 through 2026 to accumulate the P1,000, how much must each
payment be? (Note that the payments begin a year from today.)
c. If your father offers to make payments calculated in Part b or to
give you P750 on January 1, 2023, which would you choose?
Explain.
d. If you have only P750 on January 1, 2023, what interest rate,
compounded annually for 3 years, how much must you earn to have
P1,000 on January 1, 2026?
e. Suppose you can deposit only P200 each January 1 from 2022
through 2026, what interest rate, with annual compounding, must
you earn to end up with P1,000 on January 1, 2026?
f. Your father offers to give you P400 on January 1, 2023. You will
then make six additional equal payments each 6 months from July
2026 through January 2026. If your bank pays 8% compounded
semiannually, how large must each payment be for you to end up
with P1,000 on January 1, 2026?
g. What is the effective annual rate earned on the bank account in Part
f? What is the APR earned on the account?
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