TIME VALUE OF MONEY

Mr. Money had a relative deposit of $10 at 5.5% interest 200 years ago. How much would the
investment be worth today?
Solution:

$ 447,189.84

10 x (1.055)200 = $ 447,189.84

Mr. Google needs $10,000 in one year for the down payment on a new car. If he can earn 7% annually,
how much does he need to invest today?
Solution:

$ 9,345.79

$ 10,000 / (1.07)1 = $ 9,345.79

You want to begin saving for your daughters college education and you estimate that she will need
$150,000 in 17 years. If you feel confident that you can earn 8% per year, how much do you need to
invest today?
Solution:

$ 40,540.34

$ 150,000 / (1.08)17

Mr. Investor is looking at an investment that will pay $1,200 in 5 years if he invests $1,000 today. What
is the implied rate of interest?
Solution:

3.714%

r = (FV / PV) 1/t 1

r = (1,200/1,000)1/5 1 = .03714

You are offered an investment that will allow you to double your money in 6 years. You have $10,000 to
invest. What is the implied rate of interest?
Solution:

12.25%

r = (20,000/10,000)1/6 1 = 0.1225

Mr. Futuristic has a 1-year old son and he wants to provide $75,000 in 17 years towards his sons college
education. He currently has $5,000 to invest. What interest rate must he earn to have the $75,000
when he needs it?
Solution:

17.27%

r = (75,000/5,000)1/17 1 = 0.1727

Interest Rates & Bond Valuation

Consider a bond with a coupon rate of 10% and annual coupons. The par value is $1,000 and the bond
has 5 years to maturity. The yield to maturity is 11%. What is the value of the bond?
Solution:

$ 963.04

B = PV of annuity + PV of lump sum

B = 100[1 1/(1.11)5]/.11 + 1,000/(1.11)5
B = 369.59 + 593.45 = 963.04

Suppose you are looking at a bond that has a 10% annual coupon and a face value of $1000. There are
20 years to maturity and the yield to maturity is 8%. What is the price of this bond?
Solution:

$ 1,196.36

B = PV of annuity + PV of lump sum

B = 100[1 1/(1.08)20]/.08 + 1000/(1.08)20
B = 981.81 + 214.55 = 1196.36