Qn 1.

Approximately how many years are needed to double a $500 investment

when interest rates are 12.75 percent per year? (Round your answer to 2 decimal
places.)

Qn 1 Solution:
PV = 500 FV = 500 x 2 = 1,000 k=0.1275 n=?

500 = 1,000 / (1.1275)^n

500 x (1.1275)^n = 1,000
(1.1275)^n = 2

n * Ln (1.1275) = Ln 2
n = Ln 2/ Ln (1.1275)
n = 5.78 years
Qn 2.
An account was opened with $1,000 10 years ago. Today, the account balance is
$1,500. If the account paid interest compounded annually, how much interest on
interest was earned?

PV = 1,000 FV = 1,500 k= not available n= 10

1,500 = 1,000 (1+k)^10

1.5 = (1+k)^10
1.5^(1/10) = (1+k)^(10/10) (we multiply the exponents with 1/10)
1.5^(1/10) = 1+k
1.041379 = 1+ k
K = 0.041379

Simple Interest
= 4.1379%*1000*10
=413.79
Total interest earned
=1500-1000
=500
Interest on interest means the gap between simple and compounding interest.

Interest on interest earned=500-413.80=86.20

Qn 3.
Montreal Financial Services Company offers a perpetuity of $4523 per year with
the first payment at the end of year. If your opportunity cost is 17% compounded
annually, the present value of the perpetuity today is $_____________.

PMT = $4523 k = 0.17

PV = 4523/ 0.17 = 26605.88
Qn 4:
In order to help you through college, your parents just deposited $23,000 into a
bank account paying 5.7% interest. Starting tomorrow you plan to withdraw equal
amounts from the account at the beginning of each of the next four years. What is
the MOST you can withdraw annually?
N=4 I/Y = 5.7 PV = 23,000 FV = 0
P/Y = 1 C/Y = 1 BEG PMT =??

Answer: PMT = 6,236.58

What type of cash flow is this?

Annuity Due

6,236.58 6,236.58 6,236.58 6,236.58

-23,000
Qn 5: Solution
What is the present value of a payment plan which is paying nothing from t=0 to
t=4, then paying 10000 at t=5, 11000 at t=6 and 12000 at t=7, if the effective
annual rate is 11%

PV for t = 5,
10,000 / 1.11^5 = 5,934.51

PV for t = 6,
11,000 / 1.11^6 = 5,881.04

PV for t = 7,
12,000 / 1.11^7 = 5,779.90

PV0 = 5934.51 + 5,8881.04 + 5779.90 = 17,595.46