FIN220 Time value of Money Practice Questions.

. 1) If you deposit $10,000 in a bank account that pays 10 percent interest annually, how much money will be in your account after 5 years? (Answer: $16,105.10) What is the present value of a security that promises to pay you $5,000 in 20 years? Assume that you can earn 7 percent if you were to invest in other securities of equal risk. (Answer: $1,292.095014) What is the future value of a 5-year ordinary annuity that promises to pay you $300 each year? The rate of interest is 7 percent. (Answer: $1,725.221703) What is the future value of a 5-year annuity due that promises to pay you $300 each year? Assume that all payments are reinvested at 7 percent a year, until Year 5. (Answer: $1,845.987222) An investment pays you $100 at the end of each of the next 3 years. The investment will then pay you $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If the interest rate earned on the investment is 8 percent, what is its present value? What is its future value? (Answer: PV=$923.975442, FV=$1,466.232904) Which amount is worth more at 14 percent, compounded annually: $1,000 in hand today or $2,000 due in 6 years? (Answer: $1,000 today because PV of $2,000 is only $911.173095) You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year, with the first payment being made a year from today, in a bank account that pays 12 percent interest, compounded annually. Your last deposit will be less than $1,250 if less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal, and how large will the last deposit be? (Answer: 6 years, deposit in year 6 will be $1,106.013696) You just started your first job, and you want to buy a house within 3 years. You are currently saving for the down payment. You plan to save $5,000 the first year. You also anticipate that the amount you save each year will rise by 10 percent a year as your salary increases over time. Interest rates are assumed to be 7 percent, and all savings occur at year end. How much money will you have for a down payment in 3 years? (Answer: $17,659.500000)

2)

3)

4)

5)

6)

7)

8)

FIN220 Time value of Money Practice Questions. 9) Your client is 40 years old and wants to begin saving for retirement. You advise the client to put $5,000 a year into the stock market. You estimate that the markets return will be, on average, 12 percent a year. Assume the investment will be made at the end of the year. a. If the client follows your advice, how much money will she have by age 65? (Answer: $666,669.3503) b. How much will she have by age 70? (Answer: $1,206,663.422) 10) A 15-year security has a price of $340.4689. The security pays $50 at the end of each of the next 5 years, and then it pays a different fixed cash flow amount at the end of each of the following 10 years. Interest rates are 9 percent. What is the annual cash flow amount between Years 6 and 15? (Answer: $35.000009) Find the interest rates, or rates of return, on each of the following: a) You borrow $700 and promise to pay back $749 at the end of 1 year. (Answer: 7%) b) You lend $700 and receive a promise to be paid $749 at the end of 1 year. (Answer: 7%) c) You borrow $85,000 and promise to pay back $201,229 at the end of 10 years. (Answer: 9%) d) You borrow $9,000 and promise to make payments of $2,684.80 per year for 5 years. (Answer: 15%)

11)