PROBLEM SET FOR CLASS SESSION
TOPIC2: Present Value and Future Value
1. Calculate the following interest rates assuming both simple and compound
interest:
a) What is the monthly interest rate, equivalent to an interest rate of 6%
per semester?
b) What is the 3-month interest rate, equivalent to an annual interest rate
of 12%?
c) What is the 6-month interest rate, equivalent to an annual interest rate
of 16%?
2. How much money will an investment of 100€ be worth at the end of 10 years if
invested at 15 percent a year simple interest? How much will it be worth if
invested at 15 percent a year compound interest? How long will it take your
investment to double its value at 15 percent compound interest?
3. Compute: (i) The one-year interest rate if the one-year discount factor is equal
to 0.88. (ii) The two-year discount factor if the annual interest rate with
compounding on two-year loans is 10.2%. (iii) The three-year annuity discount
factor if the present value of 10 € a year for 3 years is 24.49 €.
4. Suppose you have to pay 20,000 euros for a new car. How do you prefer to pay
for this car if the interest rate is 8% per year?
a) Four semi-annual payments of 5,000 euros, starting in six months.
b) A payment of 10,000 euros today and the remainder in one year.
c) A payment of 8,000 euros today and the remainder in 6 monthly
payments starting in one month.
d) A single payment of 20,000 euros in 9 months.
5. Compute the present value of a 10-year growing annuity whose first payment
takes place in one year and is equal to 2,000 euros, and whose remaining
payments grow at an annual rate of 2%. The interest rate is equal to 5%.
6. A ten-year old boy is going to be paid some money once he turns 18 years old.
This money is going to be paid annually, at the beginning of each year, for a
period of 7 years. It consists of 4,000 euros for the first year but it is going to
grow at 5% per year for the remaining years. Compute the present value of the
total amount that the boy is going to receive if the interest rate is equal to 8%.
7. Suppose you are a 65-year old retired homeowner. To complement your
retirement income you make the following contract with the bank: the bank
pays you 915 euros every month for as long as you live and in return your
house will revert to the bank once you die. Your house is currently valued at
183,020 euros and the annual interest rate is equal 3%. How many more years
do you need to live to make this contract profitable for you?
8. Mr. García is going to retire in 28 years and when this happens he wants to
have 750,000 euros in his pension fund. If the interest rate is equal to 4% per
year, how much money does he need to deposit every year starting in one year
to achieve his objective?
9. Suppose you borrow 10,000 € at a 5% a year compound interest rate. In order
to repay this amount and the corresponding interest payments you will have to
pay a fixed amount X every semester for two years. Compute the amortization
schedule of the loan. Repeat assuming fixed principal payments and the
corresponding interest payments.
10. Assume that a homeowner takes on a 20-year mortgage in order to borrow
100,000 euros at an interest rate of 8% per year. The mortgage payments
consist of 20 annual payments. Compute the value of each mortgage payment.
Compute the amount of money that still needs to be repaid after two mortgage
payments.
11. Suppose you buy an apartment under the conditions detailed below.
Compute the price of the apartment and the amount of money that needs to be
paid to the bank. The interest rate is 6% per year
(1) Down payment of 100,000€ when the contract is signed.
(2) The remaining payments consist of 36 monthly payments of
50000€ each payment.
(3) payment of 20,000€ per semester for 10 years.