FNCE10002 Principles of Finance Semester 2, 2026
FNCE10002 Principles of Finance
Semester 2, 2026
Introduction to Financial Mathematics I
Tutorial Questions for Lecture 1
Note that questions flagged as “EXM” are past exam questions that I’ve used in this subject. The
priority questions for this week are A2, A3, B2, B4 and B5. Your tutor will make sure to cover these
questions in your tutorial ahead of other questions. Any questions not covered in your tutorial should
be viewed as study questions for the mid semester or final exam. Answers to the tutorial questions will
be made available via the LMS once all tutorials for the week have concluded.
A. Problems
A1. Assume that you have $4,000 invested in an account today (that is, year 0). Calculate the future
value of this amount at the end of each of the following time horizons and interest rates:
a) End of three years at an interest rate of 6% per annum.
b) End of six years at an interest rate of 6% per annum.
c) End of three years at an interest rate of 12% per annum.
d) Provide a breakup of the total interest, simple interest and interest-on-interest earned in
parts (a) and (b). Show all calculations.
e) Note that the time horizon in part (a) is half the time horizon in part (b) but the total amount
of interest earned in part (a) is less than half the amount of interest earned in part (b). Why
is this the case? Explain.
A2. You have a trust fund that will pay you $1 million exactly 10 years from today. You want cash
now, so you are considering an opportunity to sell the right to the trust fund to an investor.
a) What is the lowest amount that you will be willing to sell your claim for if you could earn
the following rates of return on similar-risk investments during the 10-year period?
(i) 6% p.a. 558,394.77
(ii) 9% p.a. 422410.8
(iii) 12% p.a.
b) Rework part (a) under the assumption that the $1 million payment will be received in 15
years rather than in 10 years.
Tutorial Questions for Lecture 1 1
FNCE10002 Principles of Finance Semester 2, 2026
c) Based on your answers in parts (a) and (b), discuss the effect of both the size of the rate of
return and the time until receipt of payment on the present value of a future sum.
EXM
A3. You have been offered an investment opportunity which involves investing $20,000 today to
receive $1,000 one year from now, $3,000 two years from now and $20,000 ten years from
now. Assume that all cash flows occur at the end of the year.
a) What is the net present value (NPV) of the opportunity if the interest rate is 12% per annum?
Should you take the opportunity? Explain.
b) What is the NPV of the opportunity if the interest rate is 2% per annum? Should you take
the opportunity now? Explain.
EXM
A4. Your friend receives two offers for their seaside home. The first offer is for $1 million today
while the second offer involves the following annual payments:
End of Year Payment
0 $200,000
1 $200,000
2 $200,000
3 $200,000
4 $200,000
5 $300,000
Assuming that your friend earns an interest rate of 8% per annum on their investments, which
offer should they accept? Round your calculations to the nearest dollar.
B. Multiple Choice Questions
For each question pick the most reasonable response based only on the information provided.
B1. If you invest $50,000 in a savings account paying 6% per annum, the amount you will have
accumulated at the end of five years is closest to:
a) $50,250.
b) $63,124.
c) $66,911.
d) $67,443.
EXM
B2. Dan Singh wants to invest today in order to assure adequate funds for his child’s university
education. Dan estimates that his child will need $20,000 in 18 years, $25,000 in 19 years,
$30,000 in 20 years, and $40,000 in 21 years. Assuming end-of-the-year cash flows, the total
amount Dan would need to invest today if the investment fund earns an interest rate of 6% per
annum is closest to:
a) $34,330.
b) $36,390.
c) $38,573.
d) $40,000.
EXM
B3. Consider the following cash flow alternatives:
Alternative 1: $1,400 received at the end of one year.
Alternative 2: $2,300 received at the end of five years.
Tutorial Questions for Lecture 1 2
FNCE10002 Principles of Finance Semester 2, 2026
Alternative 3: $3,200 received at the end of ten years.
If the interest rate is 8% p.a. the rank of these alternatives from most valuable to least valuable
is:
a) Alternative 1, then alternative 2, followed by alternative 3.
b) Alternative 1, then alternative 3, followed by alternative 2.
c) Alternative 2, then alternative 3, followed by alternative 1.
d) Alternative 3, then alternative 2, followed by alternative 1.
B4. You invest $50,000 in an investment account paying an interest rate of 5% per annum. The total
amount of simple interest and interest-on-interest that you would have earned on this investment
by the end of 10 years would be closest to:
a) $6,445 and $25,000, respectively.
b) $25,000 and $6,445, respectively.
c) $25,000 and $31,445, respectively.
d) $31,445 and $25,000, respectively.
EXM
B5. Your friend owns her own business and is considering an investment opportunity. If she
undertakes the investment, it will pay $4,000 at the end of each of the next three years. The
opportunity requires an initial investment of $1,000 and an additional investment at the end of
the second year of $5,000. The net present value of this investment opportunity if the interest
rate is 2% per annum is closest to:
a) $5,730.
b) $6,000.
c) $6,730.
d) $7,652.
Tutorial Questions for Lecture 1 3