Pham Thi Ngoc Anh - 1514433

5.1. If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your
account after 5 years?

Answer:

Principal(P) =$10,000

Rate of interest(r) = 10% annual

Years(n)= 5%

Amount= P x (1+r/100) ^n

=10,000 x (1+0.10) ^5

=$16,105.1

5.2. What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay
7% annually?

Answer:

Future Value =$5000

Years= 20

Discounting=7%

Present Value = Future Value X (Present Value Interest Factor (PVIF)

= $5,000 X (1/1.07) ^ 20 years

= $5,000 X 0.258

= $1,290

5.3. Your parents will retire in 18 years. They currently have $250,000, and they think they will need
$1,000,000 at retirement. What annual interest rate must they earn to reach their goal, assuming they
don’t save any additional funds?

Answer:

Amount in 18 years = 250000 *(1+r) ^ 18

1000000 = 250000 *(1+r) ^ 18

(1+r) ^ 18 = 4
 1+r = 1.08

r = 1.08 – 1

r = 0.08 or 8%

5.4. If you deposit money today in an account that pays 6.5% annual interest, how long will it take to
double your money?

Answer:

Present Value (PV) = $100

Future Value (FV) = $200 (double)

Interest rate (r) = 6.5% per year

Time (t) =?

We know that:

FV = PV * (1+r) t

200 = 100 * (1+0.065) t

200 / 100 = (1.065) t

2 = (1.065) t

t = 11.0067 or 11years

5.5. You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the
end of every future year until your account totals $250,000. You expect to earn 12% annually on the
account. How many years will it take to reach your goal?

Answer:

FVA = 42180.53*(1+12%)^n + 5000*[(1+12%)^n-1]/12% = 250,000

42180.53*1.12^n + 5000*(1.12^n - 1)/0.12 = 250,000
42180.53*(1.12)^n + 41666.67*(1.12)^n - 41667.67 = 250,000
83847.2*(1.12)^n = 250,000+41666.67 = 291666.67
1.12^n = 291,666.67/83847.2 = 3.478
n = 10.998 = 11 years

5.6. What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an
annuity due, what would its future value be?

Answer: FV = (.07,5,300,0,1) = 1,845.98

5.7. An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300
at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually,
what is its present value? its future value?

Answer:

Year 1 $100 / (1.0 + .08) = $ 92.59

Year 2 $100 / (1.0 + .08)^2 = $ 85.73
Year 3 $100 / (1.0 + .08)^3 = $ 79.38
Year 4 $200 / (1.0 + .08)^4 = $147.01
Year 5 $300 / (1.0 + .08)^5 = $204.17
Year 6 $500 / (1.0 + .08)^6 = $315.08

Total PV = $923.98

Year 1 $100 X (1.0 + .08)^5 = $146.93

Year 2 $100 X (1.0 + .08)^4 = $136.05
Year 3 $100 X (1.0 + .08)^3 = $125.97
Year 4 $200 X (1.0 + .08)^2 = $233.28
Year 5 $300 X (1.0 + .08)^1 = $324.00
Year 6 $500 X (1.0 + .08)^0 = $500.00

Total FV = $1,466.23

5.8. You want to buy a car, and a local bank will lend you $20,000. The loan will be fully amortized over 5
years (60 months), and the nominal interest rate will be 12% with interest paid monthly. What will be the
monthly loan payment? What will be the loan’s EAR?

Answer:

Monthly payment = $444.89

EAR = (1 + r/12) ^12 - 1
= (1 + 0.12/12) ^12 - 1
= 1.01^12 - 1
= 0.1268
= 12.68%

5.9. Find the following values using the equations and then a financial calculator.
Compounding/discounting occurs annually.

a. An initial $500 compounded for 1 year at 6%

b. An initial $500 compounded for 2 years at 6%

c. The present value of $500 due in 1 year at a discount rate of 6%

d. The present value of $500 due in 2 years at a discount rate of 6%

Answer:

a. FV = $500 * (1 + 0.06) ^ 1 = $530

b. FV = $500 * (1 + 0.06) ^ 2 = $561.8

c. PV = $500 / (1 + 0.06) ^ 1 = 471.7

d. PV = $500 / (1 + 0.06) ^ 2 = 445

5.10. Find the following values. Compounding/discounting occurs annually.

a. An initial $500 compounded for 10 years at 6%

b. An initial $500 compounded for 10 years at 12%

c. The present value of $500 due in 10 years at 6%

d. The present value of $1,552.90 due in 10 years at 12% and at 6%

e. Define present value and illustrate it using a time line with data from Part d. How are present values
affected by interest rates?

Answer:

a. FV = $895.42
b. FV = $1552.92
c. PV = $279.20
d. PV = $867.13
e. PV = $500