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Time Value of Money Practice Problems

The document presents various problems related to the time value of money, including calculations for present value, future value, and effective annual rates. It covers scenarios such as deposits with different interest rates and compounding frequencies, as well as investment returns. The problems illustrate how to determine the best financial options based on given interest rates and compounding methods.

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Vietphuong TD
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6 views2 pages

Time Value of Money Practice Problems

The document presents various problems related to the time value of money, including calculations for present value, future value, and effective annual rates. It covers scenarios such as deposits with different interest rates and compounding frequencies, as well as investment returns. The problems illustrate how to determine the best financial options based on given interest rates and compounding methods.

Uploaded by

Vietphuong TD
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

PROBLEM 1

CHAPTER 3: What amount must be deposited today in an


TIME VALUE OF MONEY account paying 6% per year, compounded
monthly in order to have $2000 in the account
after 5 years?

Practice PV = FV/(1+i)^n = 2000/(1 + 0.06/12)^5x12 = 1482.74


quarterly => PV = 2000/(1+0.06/4)^5x4 = 1484.94
Problems

PROBLEM 2 PROBLEM 3

Jim makes a deposit of $12,000 in a bank account. An investor can make an investment in a real
The deposit is to earn interest annually at the rate of 9 estate development and receive an expected
percent for seven years. cash return of $45,000 after six years. Based
a) How much will Jim have on deposit at the end of on a careful study of other investment
seven years? FV = 12000 x (1.09)^7
=
alternatives, she believes that an 18 percent
b) Assuming the deposit earned a 9 percent rate of annual return compounded quarterly is a
interest compounded quarterly, how much would he
reasonable return to earn on this investment.
have at the end of seven years?
How much should she pay for it today?
c) In comparing parts (a) and (b), what are the
respective effective annual rate? Which alternative is -> PV = 15646.66 USD
better?
PROBLEM 4 PROBLEM 5
What is the EAR on your credit card with continuous From which bank will you choose to deposit
compounding if the APR is 18%?
EAR = e^0.18 -1 = 19.72%
money:
You have $300 to invest for four years. Bank A is offering A: APR = 12%, semi-annualy compounded
5% compounded annually, while the Bank B’s rate is B: APR = 11.8%, monthly compounded
4.5% APR, but with daily compounding. Where do you
put your money? C: APR = 12.5%, annualy compounded
-> Bank C

PROBLEM 6 PROBLEM 7

A given rate is quoted as 12% APR, but has an Suppose you invest $1,000 at 8%/year. How
effective annual rate (EAR) of 12.55%. What is many years you need to have $2,000 with this
the frequency of compounding during the year? investment?
a. Annually
b. Semiannually 12.55% = (1+12%/m)^m -1
c. Quarterly => quarterly

d. Monthly
e. Daily

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