Financial Institution

Zaheer Swati 1

Unit 5

PROBLEM RELATED TVM

Problem 5.1: You deposit Rs. 13,000 at the beginning of every year for 10 years. If interest is being paid at 8%, how
much will you have in 10 years? [Rs. 203,391.5]
Solution:
FVA
Due
=

CCF [
i
i
n
1 ) 1 (
] (1+i)
FVA
Due
=

13,000 [
08 . 0
1 ) 08 . 0 1 (
10

] (1+0.08)
FVA
Due
=

13,000 [15.6455)
FVA
Due
=

Rs. 203,391.5

Problem 5.2: What is the value of Rs. 100 perpetuity if interest is 7%? [Rs. 1428.57]
Solution:
PV
p
=
i
CCF

PV
p
=
07 . 0
100

PV
p
= Rs. 1428.57

Problem 5.3: You can deposit Rs. 4,000 per year into an account that pays 12% interest. If you deposit such amounts for
15 years and start drawing money out of the account in equal annual installments, how much could you draw out each
year for 20 years? [Rs. 19,963.84]
Solution:
FVA
n
=

CCF [
i
i
n
1 ) 1 (
]
FVA
15
=

4,000 [
12 . 0
1 ) 12 . 0 1 (
15

]
FVA
15
=

4,000 [37.2797]
FVA
15
=

149,118.8

CCF = PVA
[
i
i
n
) 1 (
1
1

]

CCF = 149,118
[
12 . 0
) 12 . 0 1 (
1
1
20

]

CCF = Rs. 19,963.84
Financial Institution


Zaheer Swati 2

Unit 5

Problem 5.4: How much would you have to deposit today to have Rs. 10,000 in five years at 6% interest compounded
semiannually? [Rs. 7440.94]
Solution:
PV
n
=

m n
m i
FV
*
/ 1

PV
5
=

2 * 5
2 / 06 . 0 1
000 , 10

PV
5
= 7.440.94

Problem 5.5: Construct an amortization schedule for a 3-year loan of Rs. 20,000 if interest is 9% (round to rupee)? [CCF
Rs. 7,901]
Solution:
CCF = PVA
[
i
i
n
) 1 (
1
1

]
CCF = 20,000
[
09 . 0
) 09 . 0 1 (
1
1
36

]
CCF = 20,000
2.5313
CCF = Rs. 7,901
Loan Amortization Schedule
1 2 3 4 5
Year End Installment Payments Interest Principal Repayment Outstanding
9 % on 5 2-3 5-4
0 --- --- --- 20,000
1 7,901 1,800 6,101 13,899
2 7,901 1,251 6,650 7,249
3 7,901 652 7,249 0


Problem 5.6: If you get payments of Rs. 15,000 per year for the next ten years and interest is 4%, how much would that
streamof income be worth in present value terms? [Rs. 121663.50]
Solution:
PVA
n
=

CCF [
i
i
n
) 1 (
1
1

]
PVA
10
=

15,000 [
04 . 0
) 04 . 0 1 (
1
1
10

]
PVA
10
=

15,000 [8.1109]
PVA
10
=

Rs. 121663.50
Financial Institution


Zaheer Swati 3

Unit 5

Problem 5.7: Your Company must deposit equal annual beginning of year payments into a sinking fund for an obligation
of Rs. 800,000 which matures in 15 years. Assuming you can earn 4% interest on the sinking fund, how much must the
payments be? [Rs. 38416.29]
Solution:
CCF = FVA
[
i
i
n
1 ) 1 (
] (1+i)
CCF = 800,000
[
04 . 0
1 ) 04 . 0 1 (
15

] (1+0.04)
CCF = 800,000
20.8245
CCF = Rs. 38416.29

Problem 5.8: If you deposit Rs. 45,000 into an account earning 4% interest compounded quarterly, how much would you
have in 5 years? [Rs. 54908.55]
Solution:

FV
n
=PV (1 +i / m)
n * m
FV
5
=45,000 (1 +0.04 / 4)
5* 4
FV
5
= Rs. 54908.55

Problem 5.9: How much would you pay for an investment which will be worth Rs. 16,000 in three years? Assume
interest is 5%. [Rs. 13,821.40]
Solution:
PV
n
=

n
i
FV
1

PV
n
=

3
05 . 0 1
000 , 16

PV
n
= Rs. 13,821.40

Problem 5.10: If your company borrows Rs. 300,000 at 8% interest and agrees to repay the loan in 10 equal semiannual
payments to include principal plus interest, how much would those payments be? [Rs. 36,987]
Solution:
CCF = PVA
[
m i
m i
m n
/
) / 1 (
1
1
*

]
CCF = 300,000
[
2 / 08 . 0
) 2 / 08 . 0 1 (
1
1
10

]
CCF = 300,000
8.1109

CCF = Rs. 36,987

Financial Institution


Zaheer Swati 4

Unit 5

Problem 5.11: You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs. 16,000
at the beginning of each year for 8 years. Annuity B will pay you Rs. 12,000 at the end of each year for 12 years.
Assuming your money is worth 7%, and each cost you Rs. 75,000 today, which would you prefer? [Rs. 102,228.63 and
Rs. 95,312.24]
Solution:
Option A PVA
n
=

CCF [
i
i
n
) 1 (
1
1

] (1+i)
PVA
8
=

16,000 [
07 . 0
) 07 . 0 1 (
1
1
8

] (1+0.07)
PVA
n
= Rs. 102,228.63

Option B
PVA
n
=

CCF [
i
i
n
) 1 (
1
1

]

PVA
n
=

12,000 [
07 . 0
) 07 . 0 1 (
1
1
12

]
PVA
n
=

95,312.24

Problem 5.12: What is the present value of an annuity of Rs. 2,000 per year, with the first cash flow received three years
fromtoday and the last one received 8 years fromtoday? Use a discount rate of eight percent? [Rs. 7,926.75]
Solution:

0 1 2 3 4 5 6 7 8

2,000 2,000 2,000 2,000 2,000 2,000

2,000 [
8 . 0
) 8 . 0 . 0 1 (
1
1
6

]
PVA
6
= Rs. 9,245.76
PV
2
=9,245.76 / (1 +0.08)
2

PV
2
= Rs. 7,926.75

Problem 5.13: The annual interest rate of 12% compounded monthly has an effective yield of? [12.68%]
Solution:
EAR =(1 +
m
APR
)
m
1
EAR =(1 +
12
12 . 0
)
12
1
EAR = 12.68%


Financial Institution


Zaheer Swati 5

Unit 5

Problem 5.14: The annual interest rate of 12% compounded quarterly has an effective yield of? [12.55%]
Solution:
EAR =(1 +
m
APR
)
m
1
EAR =(1 +
4
12 . 0
)
4
1
EAR = 12.55%


Problem 5.15: You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to
draw out of your savings at the rate of Rs. 10,000 per year. How much would you have to pay in equal annual deposits
until retirement to meet your objectives? Assume interest remains at 9%. [Rs. 1254.43]
Solution:
PVA
n
=

CCF [
i
i
n
) 1 (
1
1

]
PVA
10
=

10,000 [
09 . 0
) 09 . 0 1 (
1
1
10

]
PVA
10
=

10,000 [6.4177]
PVA
10
=

64,177

CCF = FVA
[
i
i
n
1 ) 1 (
]
CCF = 64,177
[
09 . 0
1 ) 09 . 0 1 (
20

]
CCF = 64,177
51.1601

CCF = Rs. 1,254.43

Problem 6.16: You deposit Rs. 17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money
invested for another 5 years how much will you have in the 15th year?
Solution:
FVA
n
=

CCF [
i
i
n
1 ) 1 (
]
FVA
10
=

17,000 [
07 . 0
1 ) 07 . 0 1 (
10

]
FVA
10
= Rs. 234,879.62
FV
n
=PV (1 +i)
n
FV
5
=234,879.62 * (1 +0.09)
5

FVA
5
= Rs. 361,391.41