Mathematics of Finance

HOMEWORK 1

1. How much would $100, growing at 5% per year, be worth after 75 years?
$3,883.27
formula: =FV(5%,75,,-100)
2. Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate
on these 8-year bonds is 5.5%, how much is the bond worth today?

$651.60
formula: =PV(5.5%,8,,-1000)
3. Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until
the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest
rate would you earn if you bought this bond at the offer price?

6.00%
formula: =RATE(5,0,-747.25,1000)

4. Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What
was the growth rate in earnings per share (EPS) over the 5-year period?

16.36%
formula: =RATE(5,,-1.5,3.2)

5. Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds
to triple?

29 years
formula: =NPER(3.8%,,-5000,15000)

6. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year,
beginning one year from today. You will deposit your savings in an account that pays 5.2% interest.
How much will you have just after you make the 3rd deposit, 3 years from now?

$13,266.56
formula: =FV(5.2%,3,-4200,,0)

7. You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year
from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year.
Under these conditions, how much would you have just after you make the 5th deposit, 5 years
from now?

$18,368.66
formula: =FV(8.5%,5,-3100,,0)

8. You want to quit your job and return to school for an MSCF degree 3 years from now, and you
plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that
pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

$23,260.70
formula: =FV(5.2%,3,-7000,,1)

9. What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate
is 5.5%?

$20,351.59
formula: =PV(5.5%,10,-2700,,0)

10. What’s the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per
year?

8.95%
formula: =85/950