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Chapter 2. Exercises - Sent

exercise for finance

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24 views4 pages

Chapter 2. Exercises - Sent

exercise for finance

Uploaded by

thuphuong21.rec
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CHAPTER 2.

TIME VALUE OF MONEY – QUIZ


The future value of a single cash flow:
1. The value in six years of $75,000 invested today at a stated annual interest rate of 7%
compounded quarterly is closest to:

The present value of a single cash flow:


2. A client requires £100,000 one year from now. If the stated annual rate is 2.50% compounded
weekly, the deposit needed today is closest to?

Future value of an annuity:


3. A couple plans to set aside $20,000 per year in a conservative portfolio projected to earn 7
percent a year. If they make their first savings contribution today, how much will they have at the
end of 20 years:

The present value of an annuity:


4. Suppose you are considering purchasing a financial asset that promises to pay €1,000 per year
for five years, with the first payment one year from now. The required rate of return is 12 percent
per year. How much should you pay for this asset?

5. A client can choose between receiving 10 annual $100,000 retirement payments, starting from
today, or receiving a lump sum today. Knowing that he can invest at a rate of 5 percent annually,
he has decided to take the lump sum. What lump sum today will be equivalent to the future
annual payments?
The present value of perpetuity:
6. Given investors require an annual return of 12.5%, a perpetual bond (i.e., a bond with no
maturity/due date) that pays $87.50 a year in interest should be valued at?

The present value of uneven cash flows:


7. What is the present value of $200 to be received one year from now, $300 to be received 3 years
from now, and $600 to be received 5 years from now assuming an interest rate of 5%?

Effective annual rate


8. Peter Wallace wants to deposit $10,000 in a bank certificate of deposit (CD). Wallace is
considering the following banks:
Bank A offers 5.85% annual interest compounded annually.
Bank B offers 5.75% annual interest rate compounded monthly.
Bank C offers 5.70% annual interest compounded daily.
Which bank offers the highest effective interest rate and how much?

9. A local bank advertises that it will pay interest at the rate of 4.5%, compounded monthly, on
regular savings accounts. What is the effective rate of interest that the bank is paying on these
accounts?

Solving for rates:


10. An investment of €500,000 today that grows to €800,000 after six years has a stated annual
interest rate closest to:
Solving for number of periods:
11. For a lump sum investment of ¥250,000 invested at a stated annual rate of 3% compounded
daily, the number of months needed to grow the sum to ¥1,000,000 is closest to:

Timeline of cash flow


12. Three years from now, an investor will deposit the first of eight $1,000 payments into a special
fund. The fund will return an interest rate of 4% compounded annually until the final deposit is
made. How much money will the investor have in the fund at the end of ten years assuming no
withdrawals are made?

13. A couple plans to pay their child’s college tuition for 4 years starting 18 years from now. The
current annual cost of college is C$7,000, and they expect this cost to rise at an annual rate of 5
percent. In their planning, they assume that they can earn 6 percent annually. How much must
they put aside each year, starting next year, if they plan to make 17 equal payments?

14. Two years from now, a client will receive the first of three annual payments of $20,000 from a
small business project. If she can earn 9 percent annually on her investments and plans to retire
in six years, how much will the three business project payments be worth at the time of her
retirement?

Amortized loan
15. John is getting a $25,000 loan, with an 8% annual interest rate to be paid in 48 monthly
installments. If the first payment is due at the end of the first month, the principal and interest
values for the first payment are closest to?

16. Nikki Ali and Donald Ankard borrowed $15,000 to help finance their wedding and reception. The
annual payment loan carries a term of seven years and an 11% interest rate. Respectively, the
amount of the first payment that is interest and the amount of the second payment that is
principal are approximately:

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