# Concepts in Time Value of Money

Please refer to the attachment/s for missing diagrams.

Answers are provided for the problems listed below. You may not find the solutions of all problems listed in the attachment/s.

1. Tom borrows $ 6000 for 5 five at 8% interest compounded annually. He repays the loan in a single payment at the end of the 5 year period. How much is his payment?

$7680

$8400

$8820

$9140

2. Tom borrows $ 6000 for 5 years at 8 % per year simple interest. He repays the loan with a single payment at the end of the 5 years. The value of the payment is most nearly

$8250

$8400

$8820

$9250

3. The interest rate is 10 % compounded annually. Ten thousand dollars 3 years from today is equivalent to a value today that is most nearly

$7513

$8140

$8477

$13310

4. Gloria borrows $ 3,000 for three years at 6 % simple interest per year. She pays the principle and interest in a single payment at the end of three years. The amount of interest ($) Gloria pays is most nearly

$500

$540

$565

$590

5. Gloria borrows $ 3,000 for three years at 6 % interest per year, compounded annually. She pays the principle and interest in a single payment at the end of three years. The amount of interest ($) Gloria pays is most nearly

$565

$575

$585

$595

6. Harry borrows $ 10,000 for ten years at 12 % interest. He pays the principle and interest at the end of the ten years. His total payment ($) at the end of ten years is most nearly

$29,000

$31,000

$32,000

$33,000

7. Harry borrows $ 10,000 for ten years at 12 % interest, compounded every six months. He pays the principle and interest at the end of the ten years. His total payment ($) at the end of ten years is most nearly

$29,000

$31,000

$32,000

$33,000

8. Harry borrows $ 10,000 for ten years at 12 % interest, compounded every three months (quarterly). He pays the principle and interest at the end of the ten years. His total payment ($) at the end of ten years is most nearly

$29,000

$31,000

$32,000

$33,000

9.

The value of (F/P, 6%, 6) is most nearly

0.6663

0.7050

1.419

1.501

10.

The value of (P/F, 4%, 9) is most nearly

0.6756

0.7026

0.7084

0.7307

11.

The value of (F/P,11%,10) is most nearly

0.3310

0.3574

2.845

2.940

12. The interest rate is 7%.

$ 4,000

P

The value of P ($) is most nearly

$2,850

$3,050

$3,550

$ 4,110

13. Interest rate = 9 %.

$ 2,000

Q

The value of Q ($) is most nearly

$ 1,500

$ 2,145

$ 2,825

$ 2,930

14. The interest rate is 10 %. I deposit $ 100 today. One year from today I deposit $ 200. How much will I have ($) four years from today?

$ 413

$ 419

$ 425

$ 439

15. At the end of two years, what will be the balance in the local bank?

$ 3,150

$ 3.300

$ 3,306

$ 3,312

16. At the end of two years, what will be the balance in the out of town bank?

$3,150.

$3,300

$3,306.

$3,312

17. How much additional interest will be earned by using the out of town bank?

$ 3

$ 5

$ 6

$12

18. How much is the lump sum payment that Marty owes under the original contract?

$371.

$385.

$394.

$423.

19. How much is the alternate payment proposed?

$371.

$385.

$394.

$423.

20. Which alternative should be selected?

Original Contract

Alternate Payment

21. Consider the following Cash Flow Table

Year Cash Flow

0 -1,000

1 0

2 0

3 - W

4 0

5 0

6 + $ 4,000

Interest rate is 8%. The value ($) of W is most nearly

$ 1,522

$ 1,780

$ 1,915

$ 2,110

22. P = $ 4,000 i = 10 % n = 5 .The value of F ($) is most nearly

$ 5,450.

$ 5,900

$ 6,250

$ 6,450.

23. P = $ 2,000 F = $ 2,800 n = 6 i (%) is most nearly

5.22%

5.76%

5.89%

6.24%

#### Solution Preview

1

PV=$6000, i=8%, n=5

FV=PV*(1+i)^n=6000*(1+8%)^5=$8816

Correct option is C. $8820

2

Simple interest=PV*i*n=6000*8%*5=$2400

Total payment at the end of 5 years=6000+2400=$8400

Option B i.e. $8400 is correct

3.

FV=$10000, i=10%, n=3

PV=FV/(1+i)^3=10000/(1+10%)^3=$7513

Option A i.e. $7513 is correct

4.

PV=$3000, i=6%, n=3

S.I.=PV*i*n=3000*6%*3=$540

Option B i.e. $540 is correct

5.

PV=$3000, i=6%, n=3

FV=PV*(1+i)^n=3000*(1+6%)^3=$3573

Interest=FV-PV=3573-3000=$573

Option B i.e. $575 is ...

#### Solution Summary

There are 23 basic problems in finance. Solution to each problem depicts the methodology to find out the value of desired parameter.