Tutorial : Time value of Money, Simple interest

and Compound interest

ESCIC 2016-2017

Exercise 1
1- a- A person borrows CFA 2, 000, 000 for 3 years at simple interest. The rate of interest
is 8% per annum. What are the interest charges for years 1 and 2 ? What is the
accumulated amount at the end of year 3 ?
b- Solve the same problem using the compound-interest method.
2- A person deposits CFA 1, 000, 000 into a savings account that earns 3% interest payable
monthly. How much interest will be credited in the rst month ? What is the accumulated
amount at the end of the rst month ?
3- CFA 1, 000, 000 is deposited into a savings account that pays 3% interest with monthly
compounding. What is the accumulated amount after two and a half years ? What is the
amount of interest earned over this period ?
3- Consider two investment schemes A and B. Scheme A oers 12% interest with annual
compounding. Scheme B oers 11.5% interest with monthly compounding. Calculate
the eective rates of interest of the two investments. Which scheme would you choose ?
Calculate the accumulated amount after 10 years on a principal of CFA 1, 000, 000.
4- The discount rate of a 3-month Treasury Bill is 6% per annum. What is the annual
eective rate of interest ? What is the accumulated value of 1 in 2 years ?
5- A fund accumulates at a simple-interest rate of 5%. Another fund accumulates at a
compound-interest rate of 4%, compounded yearly. When will the force of interest be
the same for the two funds ? After this point, which fund will have a higher force of
interest ?
If a fund accumulates at force of interest δ(t) = 0.02t, nd the annual eective rate of
interest over 2 years and 5 years.
6- Given i = 6%, calculate the present value of 1, 000 to be paid at the end of year 1, the
end of year 5 and 6.5 years.
7- An insurance agent oers a policy that pays a lump sum of 50, 000 ve years later. If
the rate of interest is 8%, how much would you pay for the plan ?
8- A person wants to accumulate 100, 000 eight years from today to sponsor his son's
education. If an investment plan oers him 8% compounded monthly, what amount
must he invest today ?
9- Find the sum of the present values of two payments of 100 each to be paid at the end
of year 4 and 9, if interest is compounded semi-annually at the nominal rate of 8% per
year, and the simple-interest method at 8% per year is used.

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 10- How long will it take for 100 to accumulate to 300 if interest is compounded quarterly
at the nominal rate of 6% per year ?
11- A savings fund requires the investor to pay an equal amount of instalment each year
for 3 years, with the rst instalment to be paid immediately. At the end of the 3 years,
a lump sum will be paid back to the investor. If the eective interest rate is 5%, what is
the amount of the instalment so that the investor can get back 10, 000 ?

Exercise 2
1- Mr X has borrowed CFA 25, 000 at compound interest for a period of 3 years. At maturity
he has to pay back 29775, 40. Determine the rate of the loan.
2- Suppose that a capital of CFA 25, 000 earns 29775, 40 of interest in 3 years. What was
the interest rate if compound interest is used ?
3- An investment of 50, 000 will produce 25000 in 3 years and 35000 in 4 years. Alternatively
investment at compound interest are used
a- At 4% will the investment be realised ? Same question at 6%
b- Find the interest rate for which the two options are indierent.
4- Four settlements : 1000 in one year, 3000 in three years, 3510 in ve years and 6000
in six years are substituted to two equal settlements for one year and two years. The
interest rate is 6%, What is the amount of these two settlements ?
5- A settlement of 50000 planned on 15/06/16 is substituted by 3 equal future settlements
15/06/17, 15/12/17 and 15/03/18. The interest rate is 6%, What is the amount of these
settlements ?
6- 20, 000 is deposited for one year into a savings account that pays compounding interest.
Then 15, 000 is taken from this account. A year after this withdrawal, only 7128 is found
in this account. Find the interest rate.

Exercise 3
1- a- At what rate of simple interest will 500 accumulate to 615 in 2.5 years ?
b- In how many years will 500 accumulate to 630 at 7.8% simple interest ?
c- At a certain rate of simple interest 1, 000 will accumulate to 1, 100 after a certain
period of time. Find the accumulated value of 500 at a rate of simple interest three
fourths as great over twice as long a period of time.
d- Simple interest of i = 4% is being credited to a fund. In which period is this equivalent
to an eective rate of 2.5% ?
2- a- Fund A is invested at an eective annual interest rate of 3%. Fund B is invested at
an eective annual interest rate of 2.5%. At the end of 20 years, the total in the two
funds is 10, 000. At the end of 31 years, the amount in Fund A is twice the amount
in Fund B. Calculate the total in the two funds at the end of 10 years.
b- Carl puts 10, 000 into a bank account that pays an annual eective interest rate of
4% for ten years. If a withdrawal is made during the rst ve and one-half years, a
penalty of 5% of the withdrawal amount is made. Carl withdrawals K at the end of
each of years 4, 5, 6, 7. The balance in the account at the end of year 10 is 10, 000.
Calculate K .
3- 100 is deposited into an account at the beginning of every 4-year period for 40 years.
The account credits interest at an annual eective rate of i. The accumulated value in

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 the account at the end of 40 years is X , which is 5 times the accumulated amount at
the end of 20 years. Calculate X .
4- Annual payments are made at the end of each year, forever. The payments at time n is
dened as n3 for the rst n years. After year n, the payments remain constant at n2 .
The present value of these payments at time 0 is 20n2 when the annual eective rate of
interest is 0% for the rst n years and 25% thereafter. Calculate n.
5- At an eective annual interest rate of i, i > 0, each of the following two sets of payments
has present value K :
(i) A payment of 121 immediately and another payment of 121 at the end of one year.
(ii) A payment of 144 at the end of two years and another payment of 144 at the end of
three years. Calculate K .
6- The present value of a series of payments of 2 at the end of every eight years, forever, is
equal to 5. Calculate the eective rate of interest.
7- A business permits its customers to pay with a credit card or to receive a percentage
discount of r for paying cash. For credit card purchases, the business receives 97% of the
purchase price one-half month later. At an annual eective rate of discount of 22%, the
two payments are equivalent. Find r.
8- You deposit 1, 000 today and another 2, 000 in ve years into a fund that pays simple
discounting at 5% per year. Your friend makes the same deposits into another fund, but
at time n and 2n, respectively. This fund credits interest at an annual eective rate of
10%. At the end of 10 years, the accumulated value of your deposits is exactly the same
as the accumulated value of your friend's deposits. Calculate n.
9- A deposit of X is made into a fund which pays an annual eective interest rate of 6% for
10 years. At the same time, X/2 is deposited into another fund which pays an annual
eective rate of discount of d for 10 years. The amounts of interest earned over the 10
years are equal for both funds. Calculate d.

Exercise 4
1- How much interest do you get if you put CFA 10, 000 from 23 April to 9 August in
a savings account that pays simple interest at a rate of 7% per annum ? What is the
capital at maturity ? In how many days will 10, 000 produce 315 of interest ?
2- Find the average rate for the following capitals : CFA 2000 invested at 3% for 30 days,
CFA 3000 invested at 4% for 40 days and CFA 4000 invested at 5% for 50 days.
3- A deposit of CFA 30000 is made into a fund at interest rate of 10% for 6 months. Find
the eective rate of this investment.
4- How much do you have after you put CFA 10000 for ve years in a savings account that
pays compound interest at a rate of 10% per annum ?
5- How much do you have to invest today to have CFA 20000 in 5 years at 10%
6- In how many years will 10000 accumulate to 23580 at 10% compound interest ?
7- At what rate of compound interest will 10000 accumulate to 17821 in 5 years ?
8- CFA 1000 is deposited into an account on 12/08/2016. From this date until the end the
year Mr Fido has done the following operations

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 Date Operation Amount
30 Aug Deposit 200
10 Sept Deposit 50
17 Sept Withdrawal 100
01 Oct Deposit 250
16 Nov Deposit 150
27 Dec Withdrawal 50
The monthly interest rate are the following : July 3%, August 3%, September 3.125%,
October 3.125%, November 3.125% and December 3.125%. How much does Mr Fido
have in the account on 31/12/2016 ?

Exercise 5
1- 2000 deposited from 5/01/2016 to 02/05/2016 into a savings account that pays simple in-
terest at 9% per annum has earned interest I . The same capital accumulates to 2068, 750
at t% interest from 18/09/2017 to 01/05/2017. Find I and t.
2- 50000 is deposited into a savings account that pays simple interest at t% per annum.
After two years the amount accumulated is deposited into a savings account that pays
simple interest at (t + 3)% per annum for three years. This last instalment has accumu-
lated to 68200. Find the interest rate t, the average rate and the average time. Comment
your results.
3- For six months, a bank give you two options of instalment
A Simple interest paid in the future at 5%.
B Simple interest paid in the advance at 4, 9%.
Which option do you prefer ?
4- Mr Dido received a loan of CFA X which will be paid back in four instalments in
an arithmetic progression. The very rst instalment of CFA 5600 will be done in three
months. Knowing that the total of all instalments is CFA 21500 and that every instalment
is composed :
• The quarter of X
• And of the relative simple interest regarding that trimester, found on the basis on
the owed remaining capital at the beginning of the trimester
Find the amount of each instalment, X and the interest rate t
5- A certain capital is shared in three parts which are in arithmetic progression, the rst
part is 70% of the third part. All the parts are deposited respectively in three rates
t1 , t2 , t3 in geometric progression which sum is 36, 4%. The yearly revenues of the rst
two parts are respectively 84, 000 and 85, 000. Find the three rates and the three parts,
nd the average rate of instalments.

Exercise 6
1- A deposit of 5000 is made into a fund which pays compound interest rate of 4.5% per
annum.
a- Find the interest earned by this instalment at the end of the rst year
b- Find the capital after ve years of instalment
c- Find the total interest earned by this instalment during ve years.

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2- A deposit of 4000 is made into a fund which pays compound interest rate of 5.2% per
annum. At maturity, we have 6000.
a- Find the duration of the instalment, n.
b- Find the interest earned by this instalment at the end of the year n − 2.
c- Find the total interest earned by this instalment during n − 2 years.
d- Find the capital after n − 2 years of instalment
3- Two capitals are deposited for three years, the rst at simple interest of 7% and the
second at compound interest of 10%. The rst capital, which is greater than the second
by CFA500, has acquired the same value of the second capital.Find the two capitals.
4- An investor borrows CFA 10, 000 for ten years at compound interest per annum. The
rate of interest is 5.5% the rst four years, 5.8% the following three years and 7% the
three last years. What is the accumulated amount at the end of ten years ? Find the
average rate for all the ten years of instalments.
5- Mme Marie has deposited 20000 into a fund which pays compound interest rate of i
per annum and 50000 at interest rate i0 per annum. After four years, she deposited an
amount of 109199, 130. If the capital 20000 was placed at rate of i0 and 50000 at interest
rate i, then the sum of the two capitals becomes 112159, 560.Find i and i0 .
6- Mr Jerey has 44650 today and he wants to share this amount to his four children of
respectively 8, 10, 12 and 14 years old. These parts are deposited into a fund which pays
compound interest rate of 5% per annum. Find the four parts assuming that Mr Jerey
wish that each single of his children receive the same amount at 18 years old.
7- Mme Martine has deposited 10000 into a fund which pays compound interest. One year
later she withdraws 10, 000. One year after this withdrawal, she has 806, 250. Find the
annual interest rate.
8- A capital of 300, 000 deposited into a bank account earn 12000 per semesters.
a- What is the annual rate equivalent to this instalment ?
b- If the capital was deposited at 7%, what are the interests per trimester ? (equivalent
rate)
c- If the interest rate announced by the bank is 9% and in fact the interests are deposited
monthly at a proportional rate, what is the equivalent yearly rate ?
9- Two capitals C1 and C2 which sum is 80000 are deposited the same day for a duration of
6 years at compound interest. Capital C1 is deposited at 8% per annum and capital C2
at 3.75%. After six years (at maturity), the total of interest earned is 46, 007.320. Find
C1 and C2 .
10- Three capitals C1 , C2 and C3 , which are in arithmetic progression with common die-
rence d = 100, are deposited the same at compound interest. Capital C1 is deposited at
10% per annum, capital C2 is deposited at 5% per semester and capital C3 at 2.5% per
trimester. After three years, the total of interest earned by the rst two capitals present
a dierence of 406, 890. Find C1 , C2 and C3 . Find the dierence of interests earned by
the second and the third capital. At what simple interest rate the rst capital should
deposited so that after three years of instalment the accumulated amount at simple in-
terest be equal to the accumulated amount at compound interest (compound interest
rate is 10%). How long does the rst capital deposited at simple interest rate of 10%
would accumulate an amount which is the same as if the same instalment was deposited
at compound interest of 10% during three years.