AC 3104: [Financial Markets and Basic Finance]      DALMAN

Individual Assignment: IA_001

TIME VALUE OF MONEY

Solve the following problems and write your answers on a separate sheet.

FV OF LUMPSUM
1. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with
annual compounding?
a. $ 241.00
b. $135.625
c. $228.07
d. $240.08
e. none of the above

2. Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual
compounding?
a. $689.01
b. $689.42
c. $654.30
d. $670.90
e. none of the above

3. Last year Rocco Corporation's sales were $225 million. If sales grow at 6% per year, how large (in
millions) will they be 5 years later?

a. $271.74
b. $286.05
c. $301.10
d. $316.16
e. $331.96

PV OF LUMPSUM

4. Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on
these 10-year bonds is 5.5%, how much is the bond worth today?

a. $585.43
b. $614.70
c. $645.44
d. $677.71
e. $711.59

5. How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?

a. $438.03
b. $461.08
c. $485.35
d. $510.89

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AC 3104: [Financial Markets and Basic Finance]      DALMAN

e. $537.78

FINDING INTEREST

6. 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?
a. 4.37%
b. 4.86%
c. 5.40%
d. 6.00%
e. 6.60%

7. Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the
bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would
you earn if you bought this bond at the offer price?

a. 3.82%
b. 4.25%
c. 4.72%
d. 5.24%
e. 5.77%

FV OF ORDINARY ANNUITY
8. 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?

a. $11,973
b. $12,603
c. $13,267
d. $13,930
e. $14,626

9. You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one
year from today. You will deposit your savings in an account that pays 6.2% interest. How much will
you have just after you make the 2nd deposit, 2 years from now?

a. $15,260
b. $16,063
c. $16,908
d. $17,754
e. $18,642

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AC 3104: [Financial Markets and Basic Finance]      DALMAN

FV OF ANNUITY DUE

10. You want to quit your job and go back to school for a law degree 4 years from now, and you plan to
save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7%
interest. Under these assumptions, how much will you have 4 years from today?
a. $16,112
b. $16,918
c. $17,763
d. $18,652
e. $19,584

PV OF ORDINARY ANNUITY

11. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is
4.5%?
a. $16,806
b. $17,690
c. $18,621
d. $19,601
e. $20,633

PV OF ANNUITY DUE

12. What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

a. $11,262.88
b. $11,826.02
c. $12,417.32
d. $13,038.19
e. $13,690.10

PERPETUITY

13. What’s the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

a. $4,750
b. $5,000
c. $5,250
d. $5,513
e. $5,788

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AC 3104: [Financial Markets and Basic Finance]      DALMAN

UNEVEN CASH FLOWS

14. What is the present value of the following cash flow stream at a rate of 6.25%?

Years: 0 1 2 3 4
| | | | |
CFs: $0 $75 $225 $0 $300

a. $411.57
b. $433.23
c. $456.03
d. $480.03
e. $505.30

NON-ANNUAL COMPOUNDING

15. What’s the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%,
compounded monthly?

a. $969
b. $1,020
c. $1,074
d. $1,131
e. $1,187

NOMINAL RATE V. EFFECTIVE RATE

16. Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but
you must make interest payments at the end of each quarter and then pay off the $10,000 principal
amount at the end of the year. What is the effective annual rate on the loan?
a. 8.24%
b.8.45%
c. 8.66%
d.8.88%
e. 9.10%

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AC 3104: [Financial Markets and Basic Finance]      DALMAN

SIMPLE INTEREST

17. Pasco Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each
month. The bank uses a 360-day year. How much interest would Pasco have to pay in a 30-day
month?
a. $120.83
b. $126.88
c. $133.22
d. $139.88
e. $146.87

FRACTIONAL TIME PERIODS

18. Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a
360-day year. How much would be in the account after 8 months, assuming each month has 30
days?
a. $5,178.09
b. $5,436.99
c. $5,708.84
d. $5,994.28
e. $6,294.00

AMORTIZATION: SOLVING FOR PAYMENT

19. Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end
of each of the next 4 years. How large would your payments be?

a. $3,704.02
b. $3,889.23
c. $4,083.69
d. $4,287.87
e. $4,502.26

20. I. The higher the interest rate, the lower is the present value.
II. The higher the interest rate, the higher is the future value.
III. Loanable funds is the sum total of all the money people and entities in an economy has
decided to save and lend out to borrowers as an investment.
IV. The rate of interest is determined at a point where the demand for loanable funds is equal to
the supply of loanable funds.

Which statement is correct?

a. Only statements I, II, III are correct.
b. Only statements I and II are correct.
c. Only statement IV is correct.
d. Only statement III and IV are correct.
e. All statements are correct.