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Ques - Lecture 2 TVM - Practice Questions

The document outlines various financial scenarios involving the time value of money, including loan amortization, interest calculations on deposits, future value of investments, retirement withdrawals, and present value of annuities. It presents problems related to borrowing, investing, and cash flow management with specific interest rates and time frames. Each scenario requires calculations to determine payments, future values, or present values based on given financial conditions.

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2 views

Ques - Lecture 2 TVM - Practice Questions

The document outlines various financial scenarios involving the time value of money, including loan amortization, interest calculations on deposits, future value of investments, retirement withdrawals, and present value of annuities. It presents problems related to borrowing, investing, and cash flow management with specific interest rates and time frames. Each scenario requires calculations to determine payments, future values, or present values based on given financial conditions.

Uploaded by

huynhngocthaodmxgr
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 2 - Time Value of Money

1.​ You are considering borrowing $100,000 for 30 years at a compound annual interest rate of 9
percent. The loan agreement calls for 30 equal annual payments, to be paid at the end of each of the
next 30 years. (Payments include both principal and interest.) What is the annual payment that will
fully amortize the loan?
2.​ The ShortHolder bank pays 5.60%, compounded daily (based on 360 days), on a 9-month
certificate of deposit. If you deposit $20,000 you would expect to earn around __________ in
interest.
3.​ With continuous compounding at 8 percent for 20 years, what is the approximate future value
of a $20,000 initial investment?
4.​ You won a contest at a local business that has paid you a single $5,000. At 22, you have
decided to invest these funds for 45 years until you retire. During this time your account will earn
13%, compounded annually, every year. As soon as you retire (exactly 45 years from today) you will
start withdrawing retirement funds every year for an additional 33 years, but you are investing more
conservatively at 8% compounded annually. How much can you withdraw each year in retirement?
5.​ You expect to deposit the following cash flows at the end of years 1 through 5, $1,000;
$4,000; $9,000; $5,000; and $2,000 respectively. Alternatively, you could deposit a single amount
today at the beginning of year 1 (end of year 0). How large does the single deposit need to be today
if you can earn 10% compounded annually? Hint: the present value today (t=0) is identical to the
single cash flow amount.
6.​ You expect to deposit the following cash flows at the end of years 1 through 5, $1,000;
$4,000; $9,000; $5,000; and $2,000 respectively. What is the future account value at the end of year
6 if you can earn 10% compounded annually?
7.​ You have just agreed to a new loan and have purchased a $3,000 computer today. The loan
has a 19.6% annual interest rate, compounded monthly. The minimum monthly payment is $58 and
you do not expect to ever pay more than the minimum payment. Assuming no additional charges or
costs will occur with this loan, approximately what will you owe on the loan at the end of 3 years
(36 months) when you expect to need another new computer?
8.​ You have just graduated and have decided to purchase a brand new sports car to enjoy your
newfound freedom. Your local credit union will provide financing for 60 months at a 9 percent
annual rate, compounded monthly. You will give 15 percent of the $26,000 purchase price in cash to
the dealer. The credit union will be used to finance the remaining 85 percent of the purchase price
with the first payment due 1 month from today. What will be your monthly payment?
9.​ What is the present value of a $1,000 ordinary annuity that earns 8% annually for an infinite
number of periods?

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