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Assignment 2

The document contains calculations of future values for various compound interest scenarios: 1) An initial $100 deposit compounded annually at 100%, 10%, and 0% over 3 years yields $800, $133, and $100 respectively. 2) An initial $500 deposit with 5 annual $100 payments compounded at 10%, 5%, and 0% over 5 years yields $1,416, $1,190, and $1,000 respectively. 3) Interest compounded quarterly versus annually yields higher future values due to more frequent compounding.

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6K views2 pages

Assignment 2

The document contains calculations of future values for various compound interest scenarios: 1) An initial $100 deposit compounded annually at 100%, 10%, and 0% over 3 years yields $800, $133, and $100 respectively. 2) An initial $500 deposit with 5 annual $100 payments compounded at 10%, 5%, and 0% over 5 years yields $1,416, $1,190, and $1,000 respectively. 3) Interest compounded quarterly versus annually yields higher future values due to more frequent compounding.

Uploaded by

Azoozy Al Ahmadi
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Student name: Athari Alahmadi

ID: LAM134
Semester: Spring 2012
Subject: FIN511
1) The following are exercises in future (terminal) values:
a) At the end of three years, how much is an initial deposit of $100 worth,
assuming a compound annual interest rate of (i) 100 percent? (ii) 10 percent?
(iii) 0 percent?
(i) 100 percent?
FV = PV (1+i) ^n = 100(1+100%) ^3 = $800
(ii) 10 percent?
FV = PV (1+i) ^n = 100(1+10%) ^3 = $133
(iii) 0 percent
FV = PV (1+i) ^n = 100(1+0%) ^3 = $100
b) At the end of five years, how much is an initial $ 500 deposit followed by five
year-end, annual $ 100 payment worth, assuming a compound annual interest
rate of (i) 10 Percent? (ii) 5 percent? (iii) 0 percent?
(i) 10 Percent?
FV = 500/(1+10%)^0 + 100/(1+10%)^1 + 100/(1+10%)^2 + 100/(1+10%)^3
+100/(1+10%)^4 + 100/(1+10%)^5 = $1,416
(ii) 5 percent?
FV = 500/(1+5%)^0 + 100/(1+5%)^1 + 100/(1+5%)^2 + 100/(1+5%)^3 +100/(1+5%)^4
+ 100/(1+5%)^5 = $1,190
(iii) 0 percent
FV = 500/(1+0%)^0 + 100/(1+0%)^1 + 100/(1+0%)^2 + 100/(1+0%)^3 +100/(1+0%)^4
+ 100/(1+0%)^5 = $1,000
c) At the end of six years, how much is an initial $ 500 deposit followed by five
year-end, annual $ 100 payment worth, assuming a compound annual interest
rate of (i) 10 percent? (ii) 3 percent? (iii) 0 percent?
(i) 10 Percent?
FV = 500/(1+10%)^0 + 100/(1+10%)^1 + 100/(1+10%)^2 + 100/(1+10%)^3
+100/(1+10%)^4 + 100/(1+10%)^5 + 100/(1+10%)^6= $1,657
(ii) 3 percent?
FV = 500/(1+3%)^0 + 100/(1+3%)^1 + 100/(1+3%)^2 + 100/(1+3%)^3 +100/(1+3%)^4
+ 100/(1+3%)^5 + 100/(1+3%)^6= $1,244
(iii) 0 percent

FV = 500/(1+0%)^0 + 100/(1+0%)^1 + 100/(1+0%)^2 + 100/(1+0%)^3 +100/(1+0%)^4


+ 100/(1+0%)^5 + 100/(1+0%)^6= $1,100
d) At the end of three years, how much is an initial $ 100 deposit worth, assuming
a quarterly compounded annual interest rate of (i) 100 percent? (ii) 10
percent?
(i) 100 percent?
FV = PV (1+r/4)4 = PV (1+100%/4)12 = $1,455
(ii) 10 percent?
FV = PV (1+r/4)4 = PV (1+10%/4)12 = $134
e) Why do your answers to part (d) differ from those to part (a)?
In (a) interest rate was compounded annually while in (d) is compounded more
(quarterly. The greater the compounding frequency the higher is the interest.
At the end of 10 years, how much is a $ 100 initial deposit worth, assuming an annual
interest rate of 10 percent compounded (i) annually? (ii) Semiannually? (iii) Quarterly?
(iv) Continuously?
(i) Annually?
FV = PV (1+i) ^n = 100(1+10%) ^10 = $259
(ii) Semiannually?
FV = PV (1+r/2)2 = PV (1+10%/2)20 = $265
(iii) Quarterly?
FV = PV (1+r/4)2 = PV (1+10%/4)40 = $269
(iv) Continuously?
FV = PV (1+e.10) = $110

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