Topic 5: Set 4

Week 4 Problem Solutions

 Problem 1
How much would you pay for an investment which is expected to pay
$12,000 per year for 6 years, with the first payment beginning in 3 years,
if you require a 14 percent return?

PV = = =

= $35,706.44

6 N
14 I/Y
-12,000 PMT
CPT PV = 46,664.01
which is the (present) value at the end of year 2 since the first CF begins in year 3
 Problem 2
I am looking at an investment that promises to pay me $125 per
year, with no maturity. If I require a 12 percent return, how much
will I pay?

PV = = $1044.67
Problem 3
a) Kathy promised to pay her sister Suzie $4000 in six years in
return for dental services to be performed immediately. Suzie
prefers Kathy pay in installments, so Kathy agrees to make equal,
monthly payments over the next six years. If Kathy’s opportunity
cost is three percent, how much must Kathy pay each month?

FVA = PMT*FVIFAi/m,(n)(m) = 4000 = PMT* FVIFA0.0025,72

PMT = $50.77

72 N (6)(12)
0.25 I/Y (3/12)
-4000 FV
CPT PMT = 50.77
Problem 3
b) If Kathy makes her payments at the beginning of each month,
how much must Kathy pay?

FVAD = FVA(1+i/m)

So,
PMT = 50.77/1.0025 = $50.65
Problem 4
a) Given that Henry want to have $572,328.93 in his retirement account
when he retires in 5 years, how much must he save each month over the
next 5 years in order to achieve his retirement objective if his account
earns a nominal APR of 4 percent?

FVA = PMT*FVIFAi/m,(m)(n)
572,328.93 = PMT* FVIFA0.04/12,60
PMT = $8,632.55

60 N (5)(12)
4/12 I/Y (4/12)
-572,328.93 FV
CPT PMT = 8,632.55
Problem 4

b) Given the information above, how much must Henry save each month
to accomplish his retirement objective if he makes contributions to his
retirement account at the beginning of each month?
FVAD = PMT* FVIFAi/m,(m)(n) (1 + i/m)

So, PMT =

Since the ordinary annuity PMT = = 8632.55,

PMT = = $8,603.87
Problem 5

Sookie opened an account which pays an annual rate of 8

percent, compounded semi-annually. What is the effective
yield (or APY or EAR) on her account?

EAR = = = 0.0816
Problem 6

Marceille plans to save $50 every three months over the next 5 years.
How much will be in her account when she makes the last deposit, if
her account earns a nominal interest rate of 6 percent, compounded
quarterly?

FVA = PMT*FVIFAi/m,(n)(m) = 50* FVIFA0.0015,20

PMT = $1156.18

20 N (5)(4)
1.5 I/Y (6/4)
-50 PMT
CPT FV=1156.18

9
 Problem 7
a) How much will Lindsey have in her account in 18 years if she
deposits $20,000 today, and her account earns an annual
nominal rate of 15 percent compounded monthly?
b) How much will she have if her account earns an effective yield
of 15 percent?

a) FV = PV = 20,000
= $292,655.63

b) FV = PV = 20,000 $247,509.07
Problem 8

How much must Sally deposit today if she wants to have

$50,000 in 10 years, if her account earns 3 percent,
compounded semi-annually?

= = $37,123.52
Problem 9
a) Tonya borrowed $30,000 to be repaid quarterly over the next six years.
How much will be her quarterly payments if she pays a nominal interest rate
of 4 percent per year?
b) If Tonya makes her payments at the beginning of each quarter, how much
will be her quarterly payments?

a) PVA = PMT*PVIFAi/m,(m)(n) = 30,000 = PMT* PVIFA0.0033,60

PMT = $1412.20

24 N (6)(4)
1 I/Y (4/4)
-30,000 PV
CPT PMT = 1412.20

b) PVAD = PVA(1+i/m), so, PMT = = $1398.22

 Problem 10
a) You borrow $10,000 at an Effective Yield (APY) of 8 percent. If payments are made
monthly, what periodic rate are you paying?
b) What is the APR, or nominal rate?
c) What is the effective annual rate for a $5000 loan which will be repaid monthly
over the next three years if the APR is 12 percent?

d) Periodic rate = APR/m or i/m

EAR =

rearranging, = (1 + EAR) - 1 = - 1 = 0.0064 or 0.64%

b) Periodic rate = APR/m = 0.0064(12) = 0.072 or 7.2%

c) EAR = = = 0.1268 or 12.68%