CHAPTER 6 (Time Value of Money)

Faculty: SFR

Question # 1
Sasha has a ten-year loan at 10.25% and the installment are $1,100 at the end of each year for two years and $1,500 at the end of each year for the rest of the term of the loan. What is the loan balance after three installments? Answer: __7,244___ Loan = 1100 x PVA2,10.25 + 1500 x PVA8,10.25 x PV2,10.25 = 8427 Period 0 1 2 3

Installment 1100 1100 1500

Interest 864 840 813

Principle 236 260 687

Loan Balance 8427 Loan 8191 7931 7244

if you want to use Financial Calculator to find the loan balance after three installments, you can do that too ( In that case, you dont need to show the table)

Question # 2
Robert was paid $3,663 at the end of each year for three years, starting end of year 2; and thereafter $2,442 at the end of each year for four years. Interest rate is 4.84%. If Raphael wants to accumulate $25,000 by the end of the 10th year, by how much is Raphael over or under his goal? Answer: $1850 Over 3663 X FVA 3,4.84% x FV 6,4.84 = 15309 2442 x FVA4,4.84 x FV2,4.84 = 11541 15309 + 11541 = 26850 compare to 25000 Therefore Over by $1850

Question #3
Sasha signed a bank loan and agreed to pay the installments as follows: ~ $8.880 at the end of each year for seven years and $50,000 at the end of 15th year. If the interest rate is 5.95 percent for the first seven year and 2 percent higher thereafter,

how much was the bank loan?

Answer: $67752 8880 (PVA7,5.95) + 50000 (PV8,7.95) (PV7,5.95) = 67752

Question #4
Progoti Insurance Inc. is offering you a life insurance policy with the following quotations: You pay the insurance company $121 at the end of each month for five years, starting now and they will pay you $231 at the end of each month for five years, starting fifteen years from today. The interest rate for this policy is 4.80% per annum. Calculate the present value of these cash flows and decide whether you should buy this policy. Answer: No, Loss is $447 You pay 121 x PVA60, 0.40 = 6443 You receive 231 x PVA60, 0.40 x PV180, 0.40 = 5996 Therefore Loss = 5996 - 6443 = $447 Note: When you convert the term(time) into months, you also convert the annual interest rate to monthly aswell