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FIN/500 Time value of money problems

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(1) Based on the current interest rate environment, are there specific maturities you'd favor? What about floating rate bonds in the current interest rate environment...what are your thoughts with regard to those? Lastly...there are treasury bonds called TIPS...explain what they are and what advantages and/or disadvantages you see for such investments?

(4-3) An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in year 2, and $400 in year 3 through 10 does not constitute an annuity. However, the entire series does contain annuity. Is this statement true or false?

(4-4) If a firm's earning per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.

(4-5) Would you rather have a savings account that pays 5% interest compounded semi-annually or one that pays 5% interest compounded daily? Explain.

Problems:

(4-1)
Future Value of a
Single payment
If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?

(4-2)
Present Value of a
Single Payment

What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?

(4-3)
Interest rate on a
Single Payment

Your parents will retire in 18 years. They currently have $250,000 and they think they will need $1 million at retirement. What annual interest rate must they earn to reach their goal, assuming they don't save any additional funds?

(4-4)
Number of Periods of a
Single Payment

If you deposit money today in an account that pays 6.5% annual interest, how long will it take to double your money?

(4-8)
Annuity payment and
EAR

You want to buy a car, and a local bank will lend you $20,000. The loan would be amortized over 5 years (60 months), and the nominal interest rate would be 12%, with interest paid monthly. What is the monthly loan payment? What is the loan's EFF%?

(4-27)
Present Value of a
Perpetuity

What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rate rose to 14%, what would happen to the present value of the perpetuity?

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Solution Summary

The solution determines the time value of money and present value.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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