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Chapter 3 - Practice Problems | PDF | Bonds (Finance) | Interest
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Chapter 3 - Practice Problems

This document contains 10 practice problems related to time value of money concepts. The problems cover topics like calculating future values of investments with different interest rates and compounding frequencies, determining investment amounts needed to reach a future value, and calculating bond prices. The problems provide calculations and scenarios to help students practice applying time value of money formulas.

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Thuyển Thuyển
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73 views3 pages

Chapter 3 - Practice Problems

This document contains 10 practice problems related to time value of money concepts. The problems cover topics like calculating future values of investments with different interest rates and compounding frequencies, determining investment amounts needed to reach a future value, and calculating bond prices. The problems provide calculations and scenarios to help students practice applying time value of money formulas.

Uploaded by

Thuyển Thuyển
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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5/26/2021

PROBLEM 1
CHAPTER 3: What amount must be deposited today in an
TIME VALUE OF MONEY account paying 6% per year, compounded
monthly in order to have $2000 in the account
after 5 years?

Practice
Problems

PROBLEM 2 PROBLEM 3
Jim makes a deposit of $12,000 in a bank account. An investor can make an investment in a real
The deposit is to earn interest annually at the rate of 9 estate development and receive an expected
percent for seven years. cash return of $45,000 after six years. Based
a) How much will Jim have on deposit at the end of on a careful study of other investment
seven years? alternatives, she believes that an 18 percent
b) Assuming the deposit earned a 9 percent rate of annual return compounded quarterly is a
interest compounded quarterly, how much would he
reasonable return to earn on this investment.
have at the end of seven years?
How much should she pay for it today?
c) In comparing parts (a) and (b), what are the
respective effective annual rate? Which alternative is
better?

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5/26/2021

PROBLEM 4 3. PROBLEM 5
What is the EAR on your credit card with continuous You have $300 to invest for four years. Bank A is
compounding if the APR is 18%? offering 5% compounded annually, while the
Bank B’s rate is 4.5% APR, but with daily
compounding. Where do you put your money?

PROBLEM 6 PROBLEM 7

From which bank will you choose to deposit A given rate is quoted as 12% APR, but has an
money: effective annual rate (EAR) of 12.55%. What is
the frequency of compounding during the year?
A: APR = 12%, semi-annualy compounded
a. Annually
B: APR = 11.8%, monthly compounded b. Semiannually
C: APR = 12.5%, annualy compounded c. Quarterly
d. Monthly
e. Daily

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5/26/2021

PROBLEM 8 PROBLEM 9
What is the price of a $1000 par value bond that What is the price of a zero coupon bond that has
pays 6% annual interest rate and has 5 a par value of $1000 and 8 years to
years to maturity if the interest rate on similar maturity if the interest rate on similar bonds is
bonds is 8%? 5%?

PROBLEM 10
Suppose you invest $1,000 at 8%/year. How
many years you need to have $2,000 with this
investment?

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