1. Assume that you purchase a 6-year, 12 percent savings certificate for $1,000.

If interest is
compounded annually, what will be the value of the certificate when it matures?

2. If the interest in the previous problem is compounded quarterly. What is the difference between the
ending value of the savings certificate compounded quarterly and the one compounded annually?

3. A friend promises to pay you $600 two years from now if you loan him $500 today. What annual
interest rate is your friend offering?

4. At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in just over 8 years.
How long, to the nearest year, would it take for the purchasing power of $1 to be cut in half if the
inflation rate were only 4 percent?

5. If you would like to accumulate $7,500 over the next 5 years, how much must you deposit each two
months, starting two months from now, given a 6 percent interest rate and twomonth compounding?

6. You decide to begin saving toward the purchase of a new car in 5 years. If you put $1,000 at the end
of each of the next 5 years in a savings account paying 7 percent compounded annually, how much will
you accumulate after 5 years?

FV=PV (1+r) t

FV= 1000(1+7%) 5

FV=1000(1.07)5

FV=1.40.55

7. Refer to Problem 6. What would be the ending amount if $500 payments were made at the end of
each 6-month period for 5 years and the account paid 10 percent compounded semiannually?

FV= PV (1+R/M)T*M

FV=500(1+10%/2)5*2

FV= 500(1+0.1/2)5*2

FV= 500(1+0.05)5*2

FV=1.276.28
8. Bob has $20,000 in a brokerage account, and he plans to contribute an additional $7,500 to the
account at the end of every year. The brokerage account has an expected annual return of 8 percent. If
Bob’s goal is to accumulate $375,000 in the account, how many years will it take to reach his goal?

FV=PV (1+r) t

375.000=20.000(1+8%) t

375.000/20.000=20.000 (1+8%) t

18.75= (1+8%) t

18.75= (1.08) t

Log18.75/log1.08 =t

38,086 = t

9. How much would you be willing to pay today for an investment that would return $800 each year at
the end of each of the next 6 years? Assume a discount rate of 5 percent.

PV=FV/ (1+r) t

PV= 800 / (1+5%) 6

PV= 800 / (1.05) 6

PV= 596.9723

10. What is the present value of the following cash flows (received at the end of the year) if the interest
rate is 12 percent? 1 2 3 4 5 2000 2000 2000 3000 -4000