Scribd
Upload
89 views

Time Value of Money-Exercises

X = $1,000

Uploaded by

hassan barada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
89 views

Time Value of Money-Exercises

X = $1,000

Uploaded by

hassan barada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 15

Time value of money

Exercises
Exercise 1

If you deposit $1,000 over three years at 9% annual


compounded interest ,what is the interest earned in the 2nd
year?

a) $106.93
b) $98.34
c) $98.10
d) $90.00
Answer
Interest earned at the end of year 1 is:
$1000 x 0.09= $90

Principal at the end of year 1 is:


$1000 + $90= $1090

Interest earned at the end of year 2 is:


$1090 x 0.09= $98.1
Exercise 2

What is the present worth of the following income


strings at an interest rate of 10%? (All cash flows
occur at year end.)

a) $37,741
b) $30,000
c) $32,450
d) $43,923
Answer
Exercise 3
Assume that $200 is deposited today, two years from now, four years from
now, six years from now, and eight years from now in a savings account
which earns 10% annual interest, what is the balance at the end of year 9?

a) $708
b) $1,670
c) $1,100
d) $1,517
Answer

FF=$1670
Exercise 4

You borrowed $1,000 at 8%, compounded annually. The loan


was repaid according to the following schedule. What is the
value of X?

a) $460
b) $298
c) $345
d) $108
Answer
By getting the present:

By getting the future:


Exercise 5

Two banks offer different interest rates on your deposit of


$10,000 over 3 years. Bank A offers an 8% interest
compounded annually and Bank B offers an 8.5% simple annual
interest. Which of the following statements is true?

a) With Bank B, the total balance at the end of year 3 would be $12,773.
b) You earn the same amount of interest over 3 years.
c) With Bank B you earn $150 more interest than with Bank A
d) With Bank A you earn $47 more than with Bank B
Answer

• Bank A: compound • Bank B: simple interest


interest 8% of 8.5%

F= P(F/P,8%,3) simple interest per 1 year


F=10000(1.2597) 10000x0.085=850
F=12597 simple interest per 3 years
850x3=2550
F= 10000 + 2550=12550

With Bank A you earn $47 more than Bank B


Exercise 6
How many years will it take for an investment to double itself
if the interest rate is 8% compounded annually?

a) 8.5 < N ≤ 9.5 years


b) 9.5 < N ≤ 10.5 years
c) 10.5 < N ≤ 11.5 years
d) 7.5 < N ≤ 8.5 years
Answer

F=2P
Equate both equations:
2P=
Ln 2=N ln(1.08)
N=9 years
Exercise 7
• What value of X makes these two cash flows
equivalent assuming an interest rate of 10%?
• Getting PW of the left hand side:

• Getting PW of the right hand side

• Equating both sides

You might also like