Hint: Don’t adjust the payments
FV =? PV =?
i = 6% compounded quarterly i = 7% compounded Semiannually
R = 1,000 R =5000
N=5 N=7
All payments are made 4 times in an year All payments are twice is a year
Adjustments: Adjustments:
N = 5x4 = 20 N = 7x2 = 14
i = 6%/4 = 1.5% i = 7%/2 = 3.5%
1. To the
closest
( 1+0.015 )20−1 1−( 1+0.035 )−14
FV =1000 { 0.015 } PV =5000 { 0.035 } year, how
long will it
take $200
= 23123.67 PV = 54602.6 to double
if it is
If due: Means payments are made at the If due: Means payments are made at the beginning of
beginning of period period deposited
and earns
( 1+i )n−1 1− (1+i )−n 10% p.a.?
FV =R { i
(1+i) } PV =R {i
(1+ i) }
2. Find the
( 1+.0 .15 )20−1 1−( 1+0.035 )−14
FV =1000 {0.015 }
( 1+ 0.015 ) PV =5000 {
0.035
(1+0.035) } present
value of
$500 due
FV = 23470.52 PV = 56513.69 in the
FV =? PV =?
future at
i = 6% compounded quarterly i = 7% compounded Semiannually
R = 1,000 R =5000 12%
N=5 N=7 nominal
All payments are made Semi Annually All payments are made Monthly rate,
Solution:
EAR = {1 + (0.07/2)}2 -1 = 7.1225%
0.071225 = {1 + (i/12)}12 – 1
(1.017225)1/12 = {1 + (i/12)}12x1/12
1.001424 = {1 + (i/12)}
0.001424 = i/12
i = 6.9%
1− (1+i )−n
PV =R { i }
(1+ i)
1−( 1+0.0058 )−84
PV =5000 {
0.0058 }
PV = 331716.023
semiannual compounding, discounted back 5 years.
Data
PV =?
N=5
I = 12%
R = 500
1− (1+i )−n
PV =R { i }
(1+ i)
1− (1+0.12 )−5
PV =500 {
0.12
(1+0.12) }
3. Find the future values and present values of the following ordinary annuities.
a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded semiannually
FV = ?
N= 5 x 2 = 10 periods
I = 12%/2 = 6%
R = 400
1− (1+i )−n
PV =R { i }
1−( 1+0.06 )−10
PV =400 {
0.06 }
( 1+i )n−1
FV =R { i }
( 1+ 0.06 )n−1
FV =400 {
0.06 }
b. FV of $200 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly
FV = ?
N= 5 x 4 = 20 periods
I = 12%/4 = 3%
R = 200
1− (1+i )−n
PV =R { i }
1− (1+ 0.03 )−20
PV =200 { i }
( 1+i )n−1
FV =R { i }
( 1+ 0.06 )20−1
FV =400 { 0.06 }
4. Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank pays 6% interest, compounded
quarterly. Based on effective interest rates, in which bank would you prefer to deposit your money?
EAR = {1 + (0.06/4)}4 -1 =
5. Set up an amortization schedule for a $25,000 loan to be repaid in equal installments at the end of each of the next 5 years.
The interest rate is 10%.
Calculation for Equal Payment
Present Value 25000
interest 10%
n 5
6594.
Payment 94
1− (1+i )−n
PV =R { i }
1−( 1+0.1 )−5
25000=R {
0.1 }
R = 6594.94
Amortization Schedule
Yea
r Interest Payment Principle Balance
0 25,000.00
1 2,500.00 6,594.94 4,094.94 20,905.06
2 2,090.51 6,594.94 4,504.43 16,400.63
3 1,640.06 6,594.94 4,954.87 11,445.76
4 1,144.58 6,594.94 5,450.36 5,995.40
5 599.54 6,594.94 5,995.40 -
6. How large must each annual payment be if the loan is for $50,000? Assume that the interest rate remains at 10% and that
the loan is still paid off over 5 years.
Calculation for Equal Payment
Present Value 50000
interest 10%
n 5
6594.
Payment 94
1− (1+i )−n
PV =R { i }
1−( 1+0.1 )−5
50,000=R { 0.1 }
7. Sales for Hanebury Corporation’s just-ended year were $12 million. Sales were $6 million 5 years earlier. At what rate did
sales grow?
S =12 Million
P = 6 Million
N = 5 years
I=?
S = P (1 + i )n
12 = 6 (1 + i)5
8. While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual
interest rate of 9%. If Mary repays $1,500 per year, then how long (to the nearest year) will it take her to repay the loan?
PV = 12,000
R = 1,500
N =?
i = 9%
1− (1+i )−n
PV =R { i }
1−( 1+0.09 )−n
12,000=1,500 { 0.09 }
N = 14.77 years
Confirmation
1−( 1+0.09 )−14.77
PV =1500 { 0.09 }
9. You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year —with the first payment being
made a year from today—into a bank account that pays 12% annual interest. Your last deposit will be less than $1,250 if
less is needed to round out to $10,000. How many years will it take you to reach your $10,000 goal, and how large will the
last deposit be?
PV = 10,000
R = 1,250
N =?
i = 12%
1− (1+i )−n
PV =R { i }
1−( 1+0 .12 )−n
10,000=1,250
0.12 { }
Amortization Shedule
Year Interest Payment Principle Balance
0 10,000.00
1 1,200.00 1,250.00 50.00 9,950.00
2 1,194.00 1,250.00 56.00 9,894.00
3 1,187.28 1,250.00 62.72 9,831.28
4 1,179.75 1,250.00 70.25 9,761.03
5 1,171.32 1,250.00 78.68 9,682.36
6 1,161.88 1,250.00 88.12 9,594.24
7 1,151.31 1,250.00 98.69 9,495.55
8 1,139.47 1,250.00 110.53 9,385.02
9 1,126.20 1,250.00 123.80 9,261.22
10 1,111.35 1,250.00 138.65 9,122.56
11 1,094.71 1,250.00 155.29 8,967.27
12 1,076.07 1,250.00 173.93 8,793.34
13 1,055.20 1,250.00 194.80 8,598.54
14 1,031.83 1,250.00 218.17 8,380.37
15 1,005.64 1,250.00 244.36 8,136.01
16 976.32 1,250.00 273.68 7,862.34
17 943.48 1,250.00 306.52 7,555.82
18 906.70 1,250.00 343.30 7,212.51
19 865.50 1,250.00 384.50 6,828.02
20 819.36 1,250.00 430.64 6,397.38
21 767.69 1,250.00 482.31 5,915.06
22 709.81 1,250.00 540.19 5,374.87
23 644.98 1,250.00 605.02 4,769.86
24 572.38 1,250.00 677.62 4,092.24
25 491.07 1,250.00 758.93 3,333.31
26 400.00 1,250.00 850.00 2,483.30
27 298.00 1,250.00 952.00 1,531.30
28 183.76 1,250.00 1,066.24 465.06
29 55.81 520.86 465.05 0.00
10. What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general
were to double and the appropriate discount rate rose to 14%, what would happen to the present value of the perpetuity?
PERPETUITY
PV = ?
R = 100
I = 7%
N=∞
1− (1+0.07 )−∞
PV =100 { 0.07 }
PV =100 {1−0
0.07 }
100
PV =
0.07
R
PV =
i
R
PV =
i
100
PV =
0.14
11. Your company is planning to borrow $1 million on a 5-year, 15%, annual payment, fully amortized term loan. What fraction
of the payment made at the end of the second year will represent repayment of principal?
Year Interest Payment Principle Balance
0 1,000,000.00
1 150,000.00 298,315.55 148,315.55 851,684.45
170,562.8
2 127,752.67 298,315.55 9 681,121.56
3 102,168.23 298,315.55 196,147.32 484,974.24
4 72,746.14 298,315.55 225,569.42 259,404.83
5 38,910.72 298,315.55 259,404.83 -
