SIMPLE INTEREST

1. You invest $1,000 for 20 years and end up earning$1,200 in interest using simple interest formula.
What was the annual rate of simple interest?
2. Suppose you invest $2,000 for 5 years at 4% simple interest. Which would increase your balance in 5
years the most? (A) Increasing the starting amount from$2,000 to $3,000 (B) Increasing the interest
rate to 5% annual interest (C) Increasing the time from 5 years to 6 years
3. Find the simple interest. $1974 at 6.3% for 25 weeks.

Compound Interest
4. Calculate the compound interest on $10,000 at 10% for 3 years
5. Theo deposits $2,000 deposit in a savings account earning compound interest at an annual rate of
5% compound annually. He makes no additional deposits or withdrawals. Use the formula for
compound interest to find the amount in the account after 10 years.

PRESENT VALUE
6. For each of the following, compute the future value
Present Value: $3,150, Year: 6, Interest Rate: 13%
Present Value: $8,453, Year: 19, Interest Rate: 7%
Present Value: $89,305, Year: 13, Interest Rate: 9%
Present Value: $227,382, Year: 21, Interest Rate: 5%

7. What is the present value of $6,000 to be received at the end of 6 years if the discount
rate is 12%?

Future Value
8. A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest
semiannually. The bonds are issued when the market rate is 8%. The present value
tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and
for 4% at 10 periods is 8.1109. What is the present value of interest payments?
9. What is the present value of $7,900 in 10 years at 11 percent?

Discount Rate
10. Sherwin Williams will receive $18,500 a year for the next 25 years as a result of a picture he has
painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights
now for $165,000$?
Unknown Interest Rate
11. Mr. Dow bought 100 shares of stock at $14 per share. Three years later, he sold the stock for $20 per
share. What is his annual rate of return?

Ordinary Annuities
12. Payments of $1500 quarterly for 77 years at 8% compounded quarterly. Find the present
value of each ordinary annuity.
13. Mr. Khalid wishes to save money to take a trip. If he deposits $150 at the end of each month
for 24 months in an investment that pays 12% compounded monthly, how much will he have
on deposit?

Future Value of Annuity

14. Your client is 26 years old. She wants to begin saving for retirement, with the first payment to come
one year from now. She can save $8,000 per year, and you advise her to invest it in the stock market,
which you expect to provide an average return of 10% in the future.
a. If she follows your advice, how much money will she have at 65?
b. How much will she have at 70?
c. She expects to live for 20 years if she retires at 65 and for 15 years if she retires at 70. If her
investments continue to earn the same rate, how much will she be able to withdraw at the
end of each year after retirement at each retirement

Present Value of Annuity

15. Find the future values of the following ordinary annuities:
a. FV of $400 paid each 6 months for 5 years at a nominal rate of 12% compounded
semiannually
b. FV of $200 paid each 3 months for 5 years at a nominal rate of 12% compounded quarterly
c. These annuities receive the same amount of cash during the 5-year period and earn interest
at the same nominal rate, yet the annuity in part b ends up larger than the one in part a.
Why does this occur?

Perpetuity
16. What is the present value of a $600 perpetuity if the interest rate is 5%? If interest rates
doubled to 10%, what would its present value be?
17. What is the present value of a $600 perpetuity if the interest rate is 5%? If interest rates doubled to
10%, what would its present value be?
Mixed Flows
18. Find the present values of the following cash flow streams at a 5% discount rate.

b. What are the PVs of the streams at a 0% discount rate?

19. A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 7%. He has been
offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the
end of each year. Terms of each contract are as follows:

As his
adviser, which contract would you recommend that he accept?

20. Find the amount to which $500 will grow under each of these conditions
a. 12% compounded annually for 5 years
b. 12% compounded semiannually for 5 years
c. 12% compounded quarterly for 5 years
d. 12% compounded monthly for 5 years
e. 12% compounded daily for 5 years f
f. Why does the observed pattern of FVs occur?