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CHAPTER 4
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TIME VALUE OF MONEY

SIMPLE INTEREST
Question 1. An investor puts 20,000 in a savings account that pays 8% simple interest
at the end of each year. Compare how much the investor would have after 5
vears if the money was:
i) invested for 5 years.
(i) invested for 3 years, then immediately reinvested for a further 2 years

Question 2. An investor puts 50,000 in a savings account that pays 9% simple interest
at the end of each year. Compare how much the investor would have after
10 years if the money was
(i) invested for 10 years.
i ) invested for 6 years, then immediately reinvested for a further 4 years.

Question 3. If the annual rate of simple interest increases from 20 to 225%,a man's

yearly income increases by 1,250.Find the principal

Question 4. A man invests a certain sum of money at 6% p.a. simple interest and
2
another sum at 7% p.a. simple interest.His ineome from interestafter
years was 354. One fourth of the first sum
is equal to one fifth of the
second sum. Find sum invested in each.
balance of R 2040.If the
Question 5. A saving
account opened 3 month ago now has a
much money was deposited.
bank pays 8% simple interest,how
in 4 years at
in 3 years and Rs.7,200
Question 6. A sum of money amounts to 76,400
How much principal
was deposited.
simple interest rate.
at
and 7 2,700 in 5 years
amounts to R 2,520 in 2 years
of money
Question 7. A sum
annum.
rate per cent per
interest rate. Find
simple
On
account on January 1, 2004.
in a savings to $3,294.08. What
You invest $3,200
Question 8.
accumulated
the account has
December 31, 2004,
interest rate?
is the annual
to 630 if the annual simple
accumulate
will 500
how many years
Question 9. In ?
rate is 7.8%
interest

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Question 10. If $23,500 earned simple interest of $1057.50 in 9 months, what was
the simple interest rate?
Question 11. Which of the
following mayfit the definition of interest?
(a) The amount I owe on my credit card.
(b) The amount of credit remaining on my credit card.
(c) The cost of borrowing money for some
(d) A fee charged on the money you've earnedperiod of time.
by the government.
Question 12. A person borrows $2,000 for 3
interest is 8% per annum. What are the simple
years at interest. The rate of
interest charges for years 1 and 2?
What is the accumulated amount at the
end of year 3?

COMPOUND INTEREST
Question 1.Find the accumulation of a payment of 75,000
compound interest at rate of 12/2% per annum. for 6% years under

Question 2. Find the accumulation of a

payment of 10000
compound interest at rate of 13% per annum.
for 8.75 years under

Question 3. What is the

accumulated value of $1,537 at the end of 8 years at
effective annual interest an
rate of 7%2
Question 4.A sum of 712000
deposited at
years How much it will become
compound interest become double after 5
after 20 years.
Question 5.Money accumulates in a fund at an annual interest
rate of "i"
oub
first 5 years and at an annual interest
rate of "3i" during the
is made into the fund at time 0 thereafter. A deposit of 1
,it accumulates to 5.083 at the end of 10
and to 55.486 at the end of 20 years
years. What is the value of the
end of 12 years. deposit at the
Qyestion 6.Muskaan borrowed some
money at the rate of 6% p.a. for the first three
years ,8% p.a. for the next five years and 13% for the
.If the total interest paid by her at the end of period beyond 8 years
eleven years is Rs.7625 How
much money did she borrow.

Question 7.If interest rate is 8% p.a. How many

years it takes for
Give your answer to 1 place decimal.
a
principal to
triple.

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Question 8.Fund A is invested at an effective annual interest rate of 4% p.a. Fund B is
invested at an effective annual interest rate of 3.5% p.a. At the end of 10
years the total in the two funds is 50,000 At the end of 30 years the amount
in fund A is twice the amount in fund B.Calculate the total in the two funds
at the end of 5
years.
Question 9. Using compound interest formula, how long would it take for an
investment of $40,000 to increase to $45,046 if the annual compound interest
rate is 2%?

Question 10. You have $10,000 to invest now and are being offered $22,500 after
ten years as the return from the investment. The market rate is
10%
compound interest. Ignoring complications such as the effect of taxation, the
reliability of the company offering the contract, etc., do you accept the
investment?

Question 11.Using compound interest formula, what annual interest rate would
cause an investment of $5,000 to increase to $7,000
in 5years?
Question 12. Suppose that annual interest rate changes from one year to the next
Let i be the interest rate for the first year, iz the interest rate for the
second
year, in the interest rate for the nth year. What willbe the
amount value of aninvestment of P at the end of the nth year?
Question 13. An accountantfor a corporationforgot to pay the firm's income tax
Of $521,812.85 on time. The government charged a penalty based
on an annual interest rate of18% forthe 29 days the money was
late. Find the total amount (tax and penalty) that was paid.
(Use a 365 day year.)

ACCUMULATION FACTOR

Question 1. R100 is deposited at time 3 & accumulated amount at time 5 is 120. Find
A(3, 5).Also find the equivalent annual rate of interest assuming time in
years.

Question 2. 1,000 is deposited at time 5 & accumulated amount at time 10 is 1400. Find
A(5,10). Also find the equivalent annual rate of interest assuming time in
year.

Question 3. lfA(,. t2) = e007lta-t) 0 F i n d A(3,8).

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Question 4. If
A(O, )
e0.04
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OSt<4 Find A(2,8).

Eaufina
=10.12t-0.01t2-0.16 4 t<9
Question 5. It is known that the accumulation function A(0, t) is of the form
Doub A(O, t)= b(1.1)t+ct2; where b and c are constants to be determined.
If $1000 invested at time t =0 accumulates to $1700 at time t = 3; Find the
accumulated value at time t =
12 of $1000 invested at time t 1:

Question 6. $100 is deposited at time t=0 into an account whose accumulation

function is A(0,t)=1 +0.03VE
(a) Find the amount of interest generated at time 4, i.e., between t = 0
and t = 4

(b) Find the amount of interest generated between time 1 and time 4.

Question 7. Suppose A(0, t) = at2+ 10b If $X invested at time 0 accumulates to

$1,000 at time 10, and to $2,000 at time 20, Find the original amount of the
investment X:

Question 8. Suppose that A(0, t)= 0.1t2 +1, At time 0, $1,000 is invested. An
additional investment of $ Xis made at time 6. If the total accumulated
value ofthesetwo investmentsattime 8 is $18,000, Find X

PRESENT VALUUE

Question 1.An investor must make a payment of R50,000 in 5 years' time. The investor
wishes to make provision for this payment by investing a single sum now in
a deposit account that pays 10% per annum compound interest. How much
should the initial investment be?

Question 2. I will need 10,00,000 in 6 year time & I want to make provision for this
payment by investing a single sum now in a deposit A/c that pays 9% p.a.
compound interest. How much should I invest.
Question 3. A person will require 30 lac for his daughter's wedding at the end of 20
years. How much money should be deposited at the time of her birth to
give the required money at the end of time period. If the rate of interest is
8% p.a.

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Question 4.My son Agamveer is now fourteen year old. To pay for his higher sruales at
the age of 21. I will need 50 lakh. If the investment can earn 11% p.a. How
much should I deposit now to
get the required money.

Question 5.Mr. Mahavir Singh left 10,000 to be divided between his two children
Geeta and Babita. Geeta's share was to amount to a certain sum of money at
the end of 5 years and Babita's share was to amount to an equal amount at
the end of 7 years If the rate of interest is 8% p.a. Find the amount given to
each.

Question 6. Ranveer must pay a lump sum of $6000 in 5 years. What amount
deposited today at 6.2% compounded annually will amount to $6000 in 5
years?

Question 7. Calculate v assuming effective rate of interest of 4%.

Question 8, Find i if v is 0.90090

Question 9. Find i if vs is 0.64993

Question 10. Find v ifiis 13%

Question 11. What deposit

year and $2,000
dut na
made today will providefor a payment
in 3 years, if the effective rate of
of $1,000 in 1
interest is 7.5%?

been added is
amount of a loan to which interest has
Question 12. The total
$20,000.
four and one-half years.
The term of the loan was was the
accumulated at simple
interest at a rate of 6%, what
(a) If morney
amount of the loan?
interest was compounded
of interest was 6% and
rate
(b) If the annual the amount of the loan?
annually, what was
increase to $4,000 at the
investment of $500 will
13. It is krnown that an values of three payments of
Question Find the sum of the present
end of 30 years. the end of 20, 40, and 60 years.
which will occur at
$10,000 each
end of n periods and 1
value of 1 paid at the
The sum of the present
Ouestion 14. of 2n periods is 1.
Find (1 i)?2n
+
end
paid at the

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Question 15. Steve may wants to have $30,000 available in 5 years for
How much of the
payment on a house. He has inherited $25,000.
if he can
inheritance should he invest now to accumulate $30,000,
get an interest rate of 6.5%?

Question 16. A department has ordered 8 Dell computers at a cost of $1309

new
amount
each. The order will not be delivered for 6 months. What
could the department deposit in a special 6-month CD paying
5.79% p.a. to have enough to pay for the machines at time of delivery?

DISCOUNT
Question 1. If i = 8% Find d

Question 2. If d =
10% Findi

Question 3. If i 11.1% d =10% Verify that 1 d=i

-

0.65908 Find d
Question 4. If v5 is

rate of
payment is issued at aRs.5
loan, repayable by a.singleamount
Question 5. A 6 monthdiscount of 10% p.a. if the of repayment is lac.
commercial
the borrower.
How much was initially lent to

discounted 8 month before

the due date. If face value of the bill
Question 6. A bill was the bill received if rate of simple
much did the holder of
is 200,000. How
discount is 9% p.a.

for R300,000 & rate of commercial discount

loan is to be paid
Three-month
Question 7.A a m o u n t of loan?
much w a s the
is 8% p.a. How
it transfers
a payment
of 8 lakhs from a customer
is to receive
Question 8.A company of commercial discount of 7%
house at the rate
entitlement to a discount immediate payment made
its months. Find the
due is after 6
p.a. if the money
by discount house.

15,000 payable
in 5 years' time, assuming
the PV of a payment of
discount of 8%.
9.Calculate
Question rate of
effective annual
an

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Question 10.What is
discount of 9.27% per annum?
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the present value of
$1,000 due in 6% years at an
Cdufina
effective rate of

Question 11.Given an investment of ¬ 2,000, calculate the

accumulation after 5
years using:
(a) simple discount of 8% pa
(b) compound discount of 8% pa
Question 12.A payment of ¬60,000 is due in 4 years' time. Calculate the
value using: present
(a) simple interest of 3% pa
(b) simple discount of 3% pa

EFFECTTVE RATE OF INTEREST

Question 1 An investor's bank balance at various times is as follows:

1 Jan 2017 1 Jul 2017 1 Jan 2018
£6,000 £6,200 £6,600
Calculate the:
(i) effective six-monthly rate between 1January 2017 and 1 July 2017
(i) effective annual rate between 1 January2017 and1 January 2018
Question 2. A fund is earning 5% simple interest,Calculate the effectiyeinterest
ratein the 6th year.

in a mutual fund whose

Question 3. An investor purchases 1000 worth of units
dealer takes a 9% front
units are valued at 4.00. Theinvestment
later the units have a
end load" from the gross payment. One year
claim that the fund's unit value has
value of 5.00 and the fund managers
the past year." When units of the fund are
experienced a 25% growth in
sold by an investor,
redeemed.
1.5% of the value of the units
there is a redemption fee of
what is the effective
all his units after one year,
(a) If the investor sells his investment?
annual rate of interest of
the units are valued at 3.75. What is
instead that after one year
(b) Suppose
the return in this case?

rate of interest, when accumulating using a

that the effective
Question 4. Show interest rate,
decreases over time.
constant simple

EQUIVALENT RATES

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Question 1. Calculate the effective annual
interest rate that is
simple interest rate of 5% pa over 4 equivalent to a
years.
Question 2.Consider two
units &period 2non-overlapping
time periods. Period 1 has
has length 8 time units. If length 6 time
find the effective effective period interest is
1 10%,
period 2 interest.
Question 3.Consider two non-overlapping time periods. Period 1 has
units, period 2 has length 10 time units. If length 12 time
Find the effective effective period interest is
2 12%.
period 1 interest.
Question 4.Consider two
non-overlapping time periods. Period 1
units, period 2 has m time unit. If effective has length 3 time
effective period 2 interest is 17.21%. Find the period 1 interest is 10% &
value of m.
Question 5. The discount rate of a 3-month
Treasury Bill is 6% per annum. What
is the annual effective rate of interest? What is the accumulated value
of 1 in 2 years?

Question 6. A government issues a 90-day

Treasury Bill at a simple rate of
discount of 6% per annum. Calculate the effective rate of return per annum
received by an investor who purchases the Bill at issue and
maturity. holds it to

Question 7. A 90-day treasury bill was boughtby an

investor for a price of £91
per £100 nominal. After 30 days the investor sold the bill to a
second investor for a price of
£93.90 per £100 nominal. The second
investor held the bill to maturity
when it was redeemed at par. Determine
which investor obtained the higher annual effective rate of return.

Question 8. A 91-day treasury bill is bought for $98.91 and is redeemed at $100.
Calculate the annual effective rate of interest obtained from the bill.

Question 9. An investor is considering two investments. One is a 91-day deposit

which pays a rate of interest of 4% per annum effective. The second
is a treasury bill. Calculate the annual simple rate of discount from the
treasury bill if both Investments are to provide the same effective rate of
return.

Question 10. A 182-day treasury bill, redeemable at $100, was purchased for
$96.50 at the time of issue and later sold to another investor for $98

6. who held the bill to maturity. The rate of return received by the

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purchaser was 4% annum effective.
i)Calculate the length of per
time in days for which
the initial
Eaurno
purchaser held the bill.
i) Calculate the annual
investor. simple rate of return achieved by the second
ii) Calculate the annual effective rate of
investor. return achieved
by the second
Question 11. An investor wishes to obtain a rate of
effective from a 91-day interest of 3% per annum
treasury bill. Calculate:
(a) price that the investor must
the
pay per £100 nominal.
(b) the annual simple rate of discount from the treasury bill.

dufTna

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Cufino
Ans. 4. 1.08329
Ans. 5. b=1 c=0.041 7925
Ans. 6. (a) 6 (b) 3
Ans. 7. a=1/200 b=0.1 X =666.66

Ans.8. 6589.18
PRESENT VALUE
Ans. 1.Rs.31,046.06
Ans. 2 Rs.5,96,267.32

Ans. 3. Rs.6,43,644.62
Ans. 4. Rs.24,08,292.05
Babita Rs.46159.53
Rs.53840.47
Ans. 5. Geeta
Ans. 6. 4441.49

Ans. 7.0.96153

Ans. 8. 11%

Ans. 9. 0.09
Ans. 10. 0.88495

du
Ans. 11. 2540.15

Ans. 12. (a)

Ans. 13. 3281.52

Ans. 14. 2.61804

Ans. 15. 21896.2
15748.03 (b) 15386.98

na
Ans. 16. 10181.39

DISCOUNT

Ans. 1. 7.407%

Ans. 2. 11.11%

Ans. 4. 8%
Ans. 5. 475000

Ans. 6. 188000

Ans. 7. 294000

A n s . 8. 772000

A n s . 9. 1 1 6 8 0 . 3 2

Ans. 10. 544.43

3034.52
Ans. 11. (a) 3333.33 (b) 52800
5 3 5 7 1 . 4 2 (b)
Ans. 12. (a)

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EFFECTIVE RATE
Ans. 1.3.33% 10% OF INTERESST
Ans. 2. 4%
Ans. 3. (a) 12.95%
(b) -15.28%
Ans. 4. Derivation

EQUIVALENT RATES
Ans. 1. 4.66%
Ans. 2. 13.55%
Ans. 3.14.56%
Ans. 4. m = 5
Ans. 5. 6.23%
1.1285
Ans. 6. 6.23%
Ans.7. second
Ans.8. 4.494%
Ans. 9. d-3.903%
Ans. 10. t=144

duf Ina
days,19.603%,21.416%
Ans. 11. a) 99.266
b)2.945%

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