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Time Value of Money Using Rule 72

I have two questions but question 2 has three parts:

1) Using the Rule of 72, how much would $5,000 accumalte to after 27 years if the rate of return is 8% ?

2 a) What woudl the value of a $1000 face value bond with a stated interest rate of 9% return and a 10 year life ?

b) if the intrest rate increased to 10%, what would be the present value of the bond in A.

c) if the interst rate decreased to 6% what would be the present value of the bond in A ?

Solution Preview

1. The rule of 72 tells us the time taken for an investment to double. The time is calculated as 72/r, where r is the interest rate. If the interest rate is 8%, the rule says that the time taken to double the investment is 72/8=9 years. $5,000 would become $10,000 in 9 year. for 27 years, there would be three 9 year periods and the amount would be as below
Year 9 Year 18 Year 27
10,000 20,000 40,000
As we have seen 5,000 will become 10,000 in year 9. 10,000 will double to 20,000 in another 9 years ( 20,000 in a total to 18 years) and 20,000 will double to 40,000 in another 9 years. So the total amount would be 40,000 in 27 years

2. The value of a bond depends on the interest ...

Solution Summary

The solution explains the calculation of future value and bond prices