Practice Questions on Time Value of Money

IBSP Semester 1, 2021

Q1. Pragati Cash Certificate Scheme of ABC Bank is an ideal scheme for all
classes of people under different income groups. A small odd sum can be
invested for a period ranging from 1 to10 years. The certificates are issued
in convenient denominations of Rs 25, Rs 100, Rs 1000 and Rs 1,00,000.
The rate of interest is 12% p.a compounded quarterly. Calculate the issue
price of the Certificate of Rs 1,00,000 to be received after 10 years.

Rs 30794.61 EAR= (1+0.12/4)^4 – 1=12.55%

PV=100000/(1+0.1255)^10 = Rs 30,658

Q2. Mr Bhatt invests Rs 1.50 lac every year in Public Provident Fund (PPF),
for 15 years.Assume the rate of interest is 8% p.a. What will be the value of
his investment at the end of the 15 year period?

FVA= 150000*FVIFA(8,15) = 150000*27.152= Rs 40,72,800

Q3. Consider a situation where you are saving for retirement. You currently
have $40,000 saved and would like to save an additional $75 per week for
the next 30 years. You estimate that when you retire (30 years from today),
you want to be able to withdraw $750 each week for the next 20 years and
have $200,000 left over at the end of the 20-year retirement period.
Assuming you earn 5% during retirement, what rate of return must you earn
during the next 30 years to meet your goal?

PHASE 1,30 Retirement PHASE 2, 20

FV= 40000FVIF(r,30)+75*FVIFA(r/52,30*52) =PV= 750PVIFA(5/52, 20*52) + 200000PVIF(5,20)

Q4. Determine the answer to each of the following questions.

a. Find the Future Value of $2500 invested today at 11% for 10 years
=7098.55, FV=2500*FVIF(11,10)
b. Find the Future Value of $2500 invested today at 11% for 30
years.=57230, FV=2500*FVIF(11,30)
c. Find the Present Value of $6000 received 10 years from today if the
discount rate is 5%., =3680.98, PV=6000*PVIF(5,10)
d. Find the Present Value of $6000 received 10 years from today if the
discount rate is 10%., =2113.122, PV=6000*PVIF(10,10)
e. Find the Future Value of $3000 per year (at the end of each year) invested
at 6% for 30 years., =237174.55, FVA=3000*FVIFA(6,30)
f. Find the Future Value of $3000 per year (at the end of each year) invested
at 12% for 30 years. FVA=7,23,999, 3000*FVIFA(12,30)
g. Find the Present Value of $4000 per year (at the end of each year) if the
discount rate is 15% for 20 years. =25036,PVA=4000*PVIFA(15,20)
h. Find the Present Value of $4000 per year (at the beginning of each year)
if the discount rate is 15% for 40 years.
PVAD= 4000*PVIFA(15,40)*(1+0.15)= 32398.99

Q5. Find the interest rates implied by each of the following:

a. You borrow $1500 today and promise to repay the loan by making a
single payment of $2114.00 in 5 years.
1500FVIF(r,5)=2114, FVIF(r,5)=1.409, 7%(approx)

1500(1+r)^5=2114

FVIF(r,n)= (1+r)^n
b. You invest $500 today and receive a promise of receiving back
$193.50 for each of the next 4 years
500=193.5PVIFA(r,4)
PVIFA(r,4)=2.583, r=20%

0 -500
1 193.5
2 193.5
3 193.5
4 193.5
Q6. If $2000 is invested today at a 12% nominal interest rate, how much
will it be worth in 15 years if interest is compounded

a. Annually FV=2000*FVIF(12,15)= 10947.12

b. Quarterly FV=2000*FVIF(3,60)= 11,783.206, m=4, 2000*(1.03)^60
c. Monthly FV= 2000*FVIF(1,180)=2000*(1.01)^180= 11991.60, m=12
d. Daily (365-days per year)=
2000*FVIF(0.032877%,5475)=2000(1+0.00032877)^5475= 12095.90 Rs,
m=365

Q7. How long will it take your money to triple given the following interest
rates? 3PV=FV, 3= FVIF(15,n), FV=PV*FVIF(r,n)
a. 5%, n=23
b. 10%, n=12
c. 15%, n=8

Q8. After graduating from college you make it big — all because of your
success in business finance. You decide to endow a scholarship for needy
finance students that will provide $5000 per year indefinitely, beginning 1
year from now. How much must be deposited today to fund the scholarship
under the following conditions.
a. The interest rate is 10%, PV@10%, “PV(perpetuity)=A/r”,
5000/0.1=50000
b. The interest rate is 10% and the first payment is made 6 years from
today instead of 1 year from today. PV(perpetuity)=
5000/0.1=50000*PVIF(10,5)=$ 31050- (PV)
PVIF(11.5,5)= 1/(1+0.115)^5

FVIF(11.5,5)= (1+0.115)^5
FV=PV(1+r)^n

Q9. Find the present value of the following cash flow stream if the discount
rate is 12%:
a. Years 1-10, $4000 per year, 22600, 4000*PVIFA(12,10)
b. Years 11-15 $6000 per year, 6964.86, 6000*PVIFA(12,5)*PVIF(12,10)
c. Years 16-20 $8000 per year, 8000*PVIFA(12,5)*PVIF(12,15)= 5277.72

Q10. Find the value of the following cash flow stream at the end of year 30
if the rate of return is 8%:
a. Years 1-5 $3000 per year, 3000*FVIFA(8,5)*FVIF(8,25)= 120531.648
b. Year 6, $7500, 7500*FVIF(8,24)= 47559
c. Years 7-15 $9000 per year, 9000*FVIFA(8,9)*FVIF(8,15)=356507.424
d. Years 16-30 $12,000 per year, 12000*FVIFA(8,15)=325824

Q11. Find the effective annual rate of interest for a nominal rate of 9%
compounded EAR=(1 + i/m)^m - 1
a. Annually, 9%, m=1
b. Quarterly, m=4, (1+0.09/4)^4-1= 9.308%
c. Monthly, m =12, (1+0.09/12)^12-1= 9.38%
d. Daily (365 days per year),m=365, (1+0.09/365)^365-1=9.42%

Q12. Your firm has a retirement plan that matches all contributions on a
one-to-two basis. That is, if you contribute $3000 per year, the company will
add $1500 to make it $4500. The firm guarantees a 9% return on your
investment. Alternatively, you can “do-it-yourself” and you think you can
earn 12% on your money by doing it this way. The first contribution will be
made 1 year from today. At that time, and every year thereafter, you will put
$3000 into the retirement account(SF). If you want to retire in 25 years,
which way are you better off?

Company Plan Do-it-Yourself Plan

Step 1: 25 N Step 1: 25 N
Step 2: 9 I/Y Step 2: 12 I/Y
Step 3: 0 PV Step 3: 0 PV
Step 4: 4500 PMT Step 4: 3000 PMT
Step 5: Step 5: FV=
FV⇒ 4500*FVIFA(9,25) 3000*FVIFA(12,25)=133.334*30
$381,154.5 00 $400,002.00

Q13. Jen is planning for retirement. She plans to work for 32 more years.
She currently has $15,000 saved and, for the next 15 years, she can save
$6,000 at the end of each year. Fifteen years from now, she wants to buy a
weekend vacation home that she estimates will require her to withdraw
$100,000. How much will she have to save in years 16 through 32 so that
she has exactly $750,000 saved when she retires? Assume she can earn 9%
throughout the 32-year period.

15 N
9 I/Y
15000 PV
6000 PMT
FV⇒ $230,802.73, 15000FVIF(9,15)+6000FVIFA(9,15)

$230,802.73 – $100,000 = $130,802.73

How much will Jen have to save at the end of each year for the remaining
years (17) to accumulate $750,000?
130802.73FVIF(9,17)+A*FVIFA(9,16)=750000

130802.73*4.3276+A*33.003 = 750000
A= $ 5573.4

Q14. You are a recent college graduate and want to start saving for
retirement. You plan to save $2000 per year for the next 15 years. After that
you will stop contributing and just allow your savings to accumulate for
another 20 years. Your twin brother would rather wait awhile before he
starts saving. He is not going to put away anything for the next ten years,
then he will start making contributions at the end of each year for the final
25 years. You both anticipate earning a 9.5% rate of return on your
investments. How much must your brother put away at the end of each year
to have the same amount of money for retirement as you?
2000*FVIFA(9.5,15)*FVIF(9.5,20) =A*FVIFA(9.5,25)

@9.5%, 375132.5, A= 4111.22

@9%, 329101.57, A=3885.45

15 N
9.5 I/Y
0 PV
2000 PMT
FV ⇒ 61,080.46

Step 2 ⇒ How much will this $61,080.46 grow to over the remaining 20
years?

20 N
9.5 I/Y
61,080.46 PV
0 PMT
FV 375,132.49

Step 3 ⇒ Since your brother will save nothing for the first 10 years, he will
start at the end of year 10 with nothing and have 25 years to accumulate
$375,132.49. How much must he save each year to accomplish this?

25 N
9.5 I/Y
0 PV
375,132.49 FV
PMT = $4,111.22

Q15. You are considering purchasing a new home. The house you are
looking at costs $120,000 and you plan to make a 10% down payment. You
checked with a bank and they have two mortgage loan options for you. The
first is a 15-year mortgage at 6.25%. The second is a 30-year mortgage at
6.50%.
a. What are your monthly payments for each loan?

Loan Amt= 108000

Option A: 108000=A*PVIFA(6.25%,15), A= 11308.9*15
Option B: 108000=A*PVIFA(6.5%,30), A= 8270.34*30

PVIFA(r,n)= [(1+r)^n – 1]/r*(1+r)^n

108000=A*PVIFA(0.52%,180), A=926.0
108000=A*PVIFA(0.54%,360), A=682.6
b. What is the total you will pay over the life of the loan for each loan?

15-Year Mortgage ⇒ $926.02×180 = $166,683.60

30-Year Mortgage ⇒ $682.63×360 = $245,746.80

c. After one year you get a job transfer and have to sell the house. What is
the payoff value of your remaining loan balance (hint: find PV of remaining
payments)?

Option A: PV=926.02*PVIFA(0.52%,168) =103511.02

Option B: PV= 682.63*PVIFA(0.54%,348)= 106792.31

d. Over the first year, how much did you pay in principal and how much did
you pay in interest?

15-Year Mortgage

Total First Year Payments (15-Year) = $926.02×12 = $11,112.24

Principal Paid (15-Year) = $108,000 – $103,511.02 = $4488.98
Interest Paid (15-Year) = $11,112.24 – $4488.98 = $6623.26

30-Year Mortgage

Total First Year Payments (30-Year) = $682.63×12 = $8191.56

Principal Paid (30-Year) = $108,000 – $106,792.31 = $1207.69
Interest Paid (30-Year) = $8191.56 – $1207.69 = $6983.87

FV= 10000*FVIF(5,20) = Rs 26532.97

m=2,r=10,n=10
Rr=Rn-Ri(approx)

Rr=1.85%, FISHER Eqn,

Rr= [(1+Rn)/(1+Ri)]-1= 1.1/1.04 - 1= 0.0576, 5.76%
1.0185-1=0.0185, 1.85%

FV=10000FVIF(1.85/2,20) = Rs12021.9
FV=10000(1+0.009259)^20=
PVGA= 29937.63

PV(perpetuity)= A/(r – g)

Q16.You want to set up an education account for your child and would like
to have $75,000 after 15 years. You find an account that pays 5.6% interest,
compounded semiannually, and you would like to deposit money in the
account every six months. How large must each deposit be in order to reach
your goal?

FV= 75000, m=2, FVIFA(2.8%,30)= 46.06

A*FVIFA(5.6/2%,30) = 75000, A=1628.187(semi annually)

Annual= $ 3256.37

IPO Book Building process

https://www.youtube.com/watch?v=TBf8KVQiEpU
https://www.youtube.com/watch?v=81ho0Ey4KbU