Concepts 'n' Clarity Time Value of money

Time Value of Money Extra Problem Set 1

1. You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to
draw out of your savings at the rate of $10,000 per year. How much would you have to pay in equal
annual deposits until retirement to meet your objectives? Assume interest remains at 9%. [$1254]

2. You can deposit $4000 per year into an account that pays 12% interest. If you deposit such amounts for
15 years and start drawing money out of the account in equal annual installments, how much could you
draw out each year for 20 years? [$19964.12]

3. What is the value of a $100 perpetuity if interest is 7%? [$1428.57]

4. You deposit $13,000 at the beginning of every year for 10 years. If interest is being paid at 8%, how
much will you have in 10 years? [$203391.33]

5. You are getting payments of $8000 at the beginning of every year and they are to last another five years.
At 6%, what is the value of this annuity? [35720.84]

6. How much would you have to deposit today to have $10,000 in five years at 6% interest compounded
semiannually? [$7440.94]

7. Construct an amortization schedule for a 3-year loan of $20,000 if interest is 9%.

8. If you get payments of $15,000 per year for the next ten years and interest is 4%, how much would that
stream of income be worth in present value terms? [$121663.50]

9. Your company must deposit equal annual beginning of year payments into a sinking fund for an
obligation of $800,000 which matures in 15 years. Assuming you can earn 4% interest on the sinking
fund, how much must the payments be? [$38415]

10.If you deposit $45,000 into an account earning 4% interest compounded quarterly, how much would you
have in 5 years? [$54908.55]

11.How much would you pay for an investment which will be worth $16,000 in three years? Assume interest
is 5%. [$13821]

12.You have $100,000 to invest at 4% interest. If you wish to withdraw equal annual payments for 4 years,
how much could you withdraw each year and leave $0 in the investment account? [$27548]

13.You are considering the purchase of two different insurance annuities. Annuity A will pay you $16,000 at
the beginning of each year for 8 years. Annuity B will pay you $12,000 at the end of each year for 12
years. Assuming your money is worth 7%, and each costs you $75,000 today, which would you prefer?
[$102228 and $95312]

14.If your company borrows $300,000 at 8% interest and agrees to repay the loan in 10 equal semiannual
payments to include principal plus interest, how much would those payments be? [$36897]

15.You deposit $17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money
invested for another 5 years how much will you have in the 15th year? [$361374]
 Time Value of Money Extra Problem Set 2

1. $7,000 dollars 10 years from now at 7% is worth how much today?

2. $10,000 dollars 7 years from now at 10% is worth how much today?
3. How much would you have to put in the bank today at 5% to accumulate $1,000 by next year?
4. If you double your money in 5 years, what interest rate did you earn?
5. If you triple your money in 10 years, what interest rate did you earn?
6. If you put $100 in the market at the end of every year for 20 years at 10%, how much would you end
up with? What if you put the $100 in at the beginning of every year?
7. If you put $100 in the market today at 10%, how much would you end up with in 20 years?
8. If you borrow $10,000 for a car loan at a 6% simple annual interest rate, what would be your
monthly payment on a 5 year loan?
9. If you borrow $150,000 for a house at a 8% simple annual interest rate for 30 years, what is your
monthly payment?
10. A simple annual interest rate of 12% compounded monthly has an effective yield of?
11. A simple annual interest rate of 12% compounded quarterly has an effective yield of?
12. A simple annual interest rate of 12% compounded semi-annually is an effective yield of?
13. If you want a $1,000,000 for retirement in 30 years, how much would you have to save by the end
of each year if you could make 12% per year? How much would you have to set aside each year if you
could put money away starting now?
14. If you put $5000 in the stock market, how many years would it take you to triple your money if the
market is making 12% a year?
15. If the effective annual interest rate is 8.5% per year, what is the nominal annual interest rate under
monthly compounding?
16. If you put $10 away at the end of each month for the next 40 years at a 12% simple annual interest
rate, how much money would you end up with? What if you started at the beginning of each month?
17. If you borrow $150,000 for a house at 8% simple annual interest rate for 15 years, what is your
monthly payment?
18. Referring to question 17, how much interest did you pay over the 15 years?
19. What is the value of a $10,000,000 lottery ticket paid out over 20 years if interest rates are at 6%,
the average tax rate is 35%, and the odds of winning are 1/7,000,000?
20. How long would it take to accumulate $50,000 if you started putting $5 in the bank every day
starting at the end of today at simple annual interest rate of 7.3%?
21. How long would it take to accumulate $50,000 if you started putting $5 in the bank every month
starting now at a simple annual interest rate of 7.3%? What if you started at the end of each month?
Answers:
1. 3,558
2. 5,131
3. 952
4. 14.87
5. 11.6
6. 5,727, 6,300
7. 673
8. 193
9. 1,100
10. 12.68
11. 12.55
12. 12.36
13. 4,144, 3,699
14. 9.7
15. 8.19
16. 117,647, 118,824
17. 1,433
18. 108,026
19. Value of winning is 6,079,058. After tax is 0.65 * 6,079,058 = 3,951,387. Expected value is then
1/7,000,000 * 3,951,387 = $.56. Thus, the expected value of the $1 ticket is only 56 cents. That’s how
the state makes money! Plus most states only pay out 50% of all receipts so they are already up
10,000,000 to start with.
20. 5,493 days
21. 679 months, 680 months

Time Value of Money Extra Multiple Choice Practice Questions

1. The present value of a single future sum:
a. increases as the number of discount periods increases.
b. is generally larger than the future sum.
c. depends upon the number of discount periods.
d. increases as the discount rate increases

2. At 8 percent compounded annually, how long will it take $750 to double?

a. 6.5 years
b. 48 months
c. 9 years
d. 12 years

3. If the interest rate is zero:

 a. PV = FVn
b. PV = FVn
c. FV = PV
d. FV = PV/en

4. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:
a. 24 percent.
b. 8 percent.
c. 18 percent.
d. 12 percent.

5. If you have $20,000 in an account earning 8 percent annually, what constant amount could you withdraw
each year and have nothing remaining at the end of 5 years?
a. $3,525.62
b. $5,008.76
c. $3,408.88
d. $2,465.78

6. You just purchased a parcel of land for $10,000. If you expect a 12 percent annual rate of return on your
investment, how much will you sell the land for in 10 years?
a. $25,000
b. $31,060
c. $38,720
d. $34,310

7. A commercial bank will loan you $7,500 for two years to buy a car. The loan must be repaid in 24 equal
monthly payments. The annual interest rate on the loan is 12 percent of the unpaid balance. How large are the
monthly payments?
a. $282.43
b. $390.52
c. $369.82
d. $353.05

8. Which of the following provides the greatest annual interest?

a. 10% compounded annually
b. 9.5% compounded monthly
 c. 9% compounded daily

9. If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the
investment be worth at the end of five years (round to nearest dollar)?
a. $72
b. $70
c. $71
d. $57

10. What is the annual compounded interest rate of an investment with a stated interest rate of 6%
compounded quarterly for 7 years (round to the nearest .1%)?
a. 51.7%
b. 6.7%
c. 10.9%
d. 6.1%

11. If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the
investment be worth in 37 weeks (round to the nearest dollar)?
a. $648
b. $635
c. $634
d. $645

12. What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to nearest $1)?
a. $1,048
b. $1,010
c. $1,038
d. $808

13. If you put $900 in a savings account that yields 10% compounded semi-annually, how much money will
you have in the account in three years (round to nearest dollar)?
a. $1,340
b. $1,170
c. $1,227
 d. $1,206

14. Which of the following provides the greatest annual yield?

a. 16% compounded quarterly
b. 15.2% compounded monthly
c. 15.2% compounded daily
d. cannot be determined

15. How much would $1,000 in an account paying 14 percent interest compounded semi-annually accumulate
to in 10 years?
a. $2,140
b. $3,707
c. $1,647
d. $3,870

16. If you want to have $90 in four years, how much money must you put in a savings account today? Assume
that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).
a. $64
b. $65
c. $66
d. $71

17. What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8%
compounded annually and round to the nearest $10.
a. $5,790
b. $11,574
c. $9,210
d. $17,010

18. If you want to have $1,200 in 27 months, how much money must you put in a savings account today?
Assume that the savings account pays 14% and it is compounded monthly (round to nearest $10).
a. $910
b. $890
c. $880
d. $860
19. If you want to have $2,100 in 3 years, how much money must you put in a savings account today?
Assume that the savings account pays 7% and it is compounded quarterly.
a. $1,656
b. $1,705
c. $1,674
d. $1,697

20. What is the present value of an annuity of $27 received at the beginning of each year for the next six
years? The first payment will be received today, and the discount rate is 10% (round to nearest $10).
a. $120
b. $130
c. $100
d. $110

21. What is the present value of $250 received at the beginning of each year for 21 years. Assume that the
first payment is received today. Use a discount rate of 12%, and round your answer to the nearest $10.
a. $1,870
b. $2,090
c. $2,120
d. $2,200

22. What is the present value of an annuity of $100 received at the end of each year for seven years? The first
payment will be received one year from today (round to nearest $10). The discount rate is 13%.
a. $440
b. $43
c. $500
d. $1,040

23. What is the present value of annuity of an $50 received at the end of each year for 3 years? Assume a
discount rate of 11%. The first payment will be received one year from today (round to nearest $1).
a. $68
b. $122
c. $136
d. $110
24. You are considering two investments: A & B. Both investments provide a cash flow of $100 per year for n
years. However, investment A receives the cash flow at the beginning of each year, while investment B receives
the cash at the end of each year. If the present value of cash flows from investment A is P, and the discount rate
is r, what is the present value of the cash flows from investment B?
a. P/(1+r)
b. P(1+r)
c. P/(1+r)n
d. P(1+r)n

25. What is the value on 1/1/85 of the following cash flows:

Date Cash Received Amount of Cash
1/1/87 $100
1/1/88 $200
1/1/89 $100
1/1/90 $100
1/1/91 $100

Use a 10% discount rate, and round your answer to the nearest $10.
a. $490
b. $460
c. $420
d. $450

26. Charlie Stone wants to retire in 30 years, and he wants to have an annuity of $1000 a year for 20 years
after retirement. Charlie wants to receive the first annuity payment at the end of the 30th year. Using an interest
rate of 10%, how much must Charlie invest today in order to have his retirement annuity (round to nearest $10).
a. $500
b. $490
c. $540
d. $570

27. If you put $510 in a savings account at the beginning of each year for 30 years, how much money will be
in the account at the end of the 30th year? Assume that the account earns 5% and round to the nearest $100.
a. $33,300
b. $32,300
c. $33,900
d. none of the above
28. If you put $310 in a savings account at the beginning of each year for 10 years, how much money will be
in the account at the end of the 10th year? Assume that the account earns 5.5% and round to the nearest $100.
a. $3,800
b. $3,900
c. $4,000
d. $4,200

29. How much money must you pay into an account at the beginning of each of 30 years in order to have
$10,000 at the end of the 30th year? Assume that the account pays 11% per annum, and round to the nearest
$1.
a. $39
b. $46
c. $50
d. none of the above

30. How much money must you pay into an account at the beginning of each of 5 years in order to have
$5,000 at the end of the 5th year? Assume that the account pays 12% per year, and round to the nearest $10.
a. $700
b. $1,390
c. $1,550
d. $790

31. You are going to pay $800 into an account at the beginning of each of 20 years. The account will then be
left to compound for an additional 20 years. At the end of the 41st year you will begin receiving a perpetuity from
the account. If the account pays 14%, how much each year will you receive from the perpetuity (round to nearest
$1,000)?
a. $140,000
b. $150,000
c. $160,000
d. $170,000

32. You are going to pay $100 into an account at the beginning of each of the next 40 years. At the beginning
of the 41st year you buy a 30 year annuity whose first payment comes at the end of the 41st year (the account
pays 12%). How much will you receive at the end of the 41st year (i.e. the first annuity payment). Round to
nearest $100.
a. $93,000
b. $7,800
c. $11,400
 d. $10,700

Answers
1. c
2. c
3. c
4. a
5. b
6. b
7. d
8. a
9. c
10. d
11. b
12. a
13. d
14. a
15. d
16. a
17. a
18. c
19. b
20. b
21. c
22. a
23. b
24. a
25. c
26. c
27. d
28. d
29. b
30. a
31. c
32. d