Exercises

PART A
1. Steve invested RM100 two years ago at 10 percent interest. The first year, he earned RM10
interest on his RM100 investment. He reinvested the RM10. The second year, he earned RM11
interest on his RM110 investment. The extra RM1 he earned in interest the second year is
referred to as: 
A) free interest.
B) simple interest.
C) bonus income.
D) interest on interest.

2. Shelley won a lottery and will receive RM1,000 a year for the next ten years. The value of her
winnings today discounted at her discount rate is called which one of the following? 
A) future value
B) present value
C) simple amount
D) compounded value

3. 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.

4. When comparing annuity due to ordinary annuities, annuity due annuities will have higher:
A) present values.
B) annuity payments.
C) future values.
D) both a and c.

5. This afternoon, you deposited RM1,000 into a retirement savings account. The account will
compound interest at 6 percent annually. You will not withdraw any principal or interest until
you retire in forty years. Which one of the following statements is correct? 
A) The interest you earn six years from now will equal the interest you earn ten years from
now.
B) The interest amount you earn will double in value every year.
C) The total amount of interest you will earn will equal RM1,000  .06  40.
D) The present value of this investment is equal to RM1,000.

6. Gerold invested RM6,200 in an account that pays 5 percent simple interest. How much money
will he have at the end of ten years? 
A) RM8,710
B) RM9,000
C) RM9,300 ( Ending value = RM6,200 + (RM6,200  .05  10) = RM9,300)
D) RM9,678

7. Today, you earn a salary of RM36,000. What will be your annual salary twelve years from now if
 you earn annual raises of 3.6 percent? 
A) RM55,032.54 ( Future value = RM36,000  (1 + .036)12 = RM55,032.54)
B) RM57,414.06
C) RM58,235.24
D) RM59,122.08

8. You are depositing RM1,500 in a retirement account today and expect to earn an average
return of 7.5 percent on this money. How much additional income will you earn if you leave the
money invested for 45 years instead of just 40 years? 
A) RM10,723.08 Future value (45 yrs) = RM1,500  (1 + .075)45 = RM38,857.26
B) RM11,790.90 Future value (40 yrs) = RM1,500  (1 + .075)40 = RM27,066.36
C) RM12,441.56 Difference = RM38,857.26 - RM27,066.36 = RM11,790.90
D) RM12,908.19

9. Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the
proceeds of that investment which totaled RM51,480.79. How much did your father originally
invest? 
A) RM15,929.47
B) RM16,500.00
C) RM17,444.86 ( Present value = RM51,480.79  [1/(1 + .0425)26] = RM17,444.86)
D) RM17,500.00

10. An ordinary annuity is best defined by which one of the following? 

A) increasing payments paid for a definitive period of time
B) increasing payments paid forever
C) equal payments paid at regular intervals over a stated time period
D) equal payments paid at regular intervals of time on an ongoing basis

11. Which one of the following accurately defines a perpetuity? 

A) a limited number of equal payments paid in even time increments
B) payments of equal amounts that are paid irregularly but indefinitely
C) varying amounts that are paid at even intervals forever
D) unending equal payments paid at equal time intervals

12. Your grandmother is gifting you RM100 a month for four years while you attend college to earn
your bachelor's degree. At a 5.5 percent discount rate, what are these payments worth to you
on the day you enter college? 
A) RM4,201.16
B) RM4,299.88
C) RM4,509.19
D) RM4,608.87

13. The Design Team just decided to save RM1,500 a month for the next 5 years as a safety net for
recessionary periods. The money will be set aside in a separate savings account which pays 4.5
percent interest compounded monthly. The first deposit will be made today. What would
today's deposit amount have to be if the firm opted for one lump sum deposit today that would
yield the same amount of savings as the monthly deposits after 5 years? 
A) RM80,459.07
 B) RM80,760.79
C) RM81,068.18
D) RM81,333.33

14. Alexa plans on saving RM3,000 a year and expects to earn an annual rate of 10.25 percent. How
much will she have in her account at the end of 45 years? 
A) RM1,806,429
B) RM1,838,369
C) RM2,211,407
D) RM2,333,572

15. As time increases for an amortized loan, the ___________ decreases.

A) interest paid per payment
B) principal paid per payment
C) the outstanding loan balance
D) both a and c

PART B
1. You have just made a RM1,500 contribution to your individual retirement account. Assume you
earn a 12 percent rate of return and make no additional contributions. How much more will
your account be worth when you retire in 25 years than it would be if you waited another 10
years before making this contribution? 
FV = RM1,500 (1 + .12)25 = RM25,500.10
FV = RM1,500  (1 + .12)15 = RM8,210.35
Difference = RM17,289.75

2. Suppose you are committed to owning a RM140,000 Ferrari. You believe your mutual fund can
achieve an annual rate of return of 9 percent and you want to buy the car in 7 years. How much
must you invest today to fund this purchase assuming the price of the car remains constant? 
PV = RM140,000 [1/(1 + .09)7; PV = RM76,584.79

3. Suppose that the first comic book of a classic series was sold in 1971. In 2017, the estimated
price for this comic book in good condition was about RM340,000. This represented a return of
27 percent per year. For this to be true, what was the original price of the comic book in 1971? 
PV = RM340,000 [1/(1 + .27)46; PV = RM5.71
4. You are scheduled to receive RM30,000 in two years. When you receive it, you will invest it for
5 more years, at 8 percent per year. How much money will you have 7 years from now? 
FV = RM30,000 (1 + .08)(7-2) = RM44,079.84

5. You expect to receive RM9,000 at graduation in 2 years. You plan on investing this money at 10
percent until you have RM60,000. How many years will it be until this occurs? 
RM60,000 = RM9,000  (1 + .10)t; t = 19.90 years
Total time = 2 + 19.90 = 21.90 years

6. En. Johan plans to make a RM20,000 personal loan with UMW Bank. The bank will charge him
4% above the Base Lending Rate, which currently is fixed at 6%. He wishes to settle the loan
installment in 5 years.
a) Determine the annual installment that En. Johan has to pay for the loan.
PV = AP (PVIFA10%,5)
RM20,000 = AP (3.7940)
AP = RM 5,271.48
b) Construct an amortization schedule for the loan.
A B C = A (k) D=B-C E=A-D
Year Beginning Annual Ending
Interest Principal
Balance Payment Balance
1 20,000.00 5275.95 2,000.00 3,275.95 16,724.05
2 16,724.05 5275.95 1,672.41 3,603.54 13,120.51
3 13,120.51 5275.95 1,312.05 3,963.90 9,156.61
4 9,156.61 5275.95 915.66 4,360.29 4,796.32
5 4,796.32 5275.95 479.63 4,796.32 0.00