Time Value of Money

Exercises:

1. How much must you deposit today in a bank account paying interest compounded monthly if
you wish to have: $12,000 at the end of 12 months, if the bank pays 6.0% interest?
2. If interest is compounded quarterly, how much will you have in a bank account if you deposit
today $5,000 at the end of 24 months and the bank pays 5.0% interest?
3. How much would you need to deposit every month in an account paying 6% a year to
accumulate by $1,000,000 by age 65 beginning at age 20?
4. Find the value of $10,000 in 10 years. The investment earns 8% for four years and then earns
4% for the remaining six years.
5. What is the present value of $10,000 to be received 3 years from today compounded
continuously at 10%?

Problems:

1. A loan of P50,000 is due 10 years from today. The borrower wants to make annual payments at
the end of each year into a sinking fund that will earn interest at an annual rate of 10 percent.
What will the annual payments have to be? Suppose that the borrower will make monthly
payments that earn 10 percent interest, compounded monthly. How much will he pay annually
into the fund?

2. Suppose that you were going to borrow enough money to go to college for 4 years. You
estimate that you will need P40,000 per trimester to cover your tuition, books and expenses.
Your uncle has agreed to lend you enough money to get you through school with no interest
until after you graduate. You and he will agree to some repayment schedule following your
graduation. If you put the funds that he would give you in a savings account that pays annual
interest at 5% compounded quarterly, how much would you need to finance your education?
Note: Assume that you will make your first withdrawal for school in 4 months since you are to
start going to school at that time and need to make the payments before the start of the
trimester. Also assume for simplification that the payments for tuition, etc., will be made at 4-
month interval.
3. Assume that you are now 25 years old and you plan to take a splash in Maldives in 5 years
which could cost you today P200,000. At the same time, you wanted to receive an annual
stream of income for 20 years on the day you’ll turn 30. That is, until you are 50. You wanted a
fixed annual income that has the same purchasing power of P50,000 today. Your income will
begin the day you turn 30. 5 years from today, inflation is expected to be 6% a year after and
will constantly grow at a compounded rate of 10% per year for both plans. You currently have
P100,000 saved up; and you expect to earn a return based on capital asset pricing model. The
market risk premium is 12% with a beta of an average stock and the risk free rate is 3%. To the
nearest dollar, how much must you save during each of the next 5 years (with deposits being
made at the end of each year) to meet your goals?