TCH 302 – PRINCIPLES OF FINANCE

Time Value of Money 1

1. If you invest $1,000 today at an interest rate of 10%/year, how much will you
have 20 years from now assuming no withdrawals in the interim?
2. If you invest $100 every year for the next 20 years starting one year from now and
you earn interest of 10% per year, how much will you have at the end of the 20
years? How much must you invest each year if you want to have $50000 at the end
of the 20 years?
3. If you borrow $10,0000 from a bank for 30 years at an APR of 13%, monthly
payment, what will EFF be?
4. What is the present value of the following cash flows at the interest rate of
10%/year?
a. $100 received 5 years from now.
b. $100 received 60 years from now.
c. $100 received each year beginning one year from now and ending 10 years from
now.
d. $100 received each year for 10 years beginning now.
e. $100 each year beginning one year from now and continuing forever.
5. You want to establish a “wasting” fund, which will provide you with $1,000 per
year for four year, at which time the fund will be exhausted. How much must you
put in the fund now if you can earn 10% interest per year?
6. You are taking out a $100,000 mortgage loan to be repaid over 25 years in 300
monthly payments.
a. If the interest rate is 16% per year, what is the amount of the monthly payment?
b. If you can only afford to pay $1,000 per month, how large a loan you could take?
c. If you can afford to pay $1,500 per month and need to borrow $100,000, how
many months would it take to pay off the mortgage?
d. If you can pay $1,500 per month, need to borrow $100,000 and want a 25-year
mortgage, what is the highest interest rate you can pay?
7. In 1626, Peter Minuit purchases Manhattan Island from the Native Americans for
about $24 worth of trinkets. If the tribe had taken cash instead and invested to earn
8% per year compounded annually, how much would the Indians have had in 2016,
390 years later?
8. You win a $1million lottery, which pays you $50,000 per year for 20 years. How
much is your prize really worth, assuming an interest rate of 8%?
9. Your great-aunt left you $20,000 when she died. You can invest the money to earn
12% per year. If you spend $3,540 per year out of this inheritance, how long will the
money last?
10. Calculate the net present value of the following cash flows: you invest $2000 today
and receive $200 one year from now, $980 two years from now and $ 1200 a year
for two years starting three years from now. Assume that the interest rate is 14% per
year.
11. How much is the value of your 12% bank account on 1/1/2016 if you put $100
into it on 1/1/2012, $200 on 1/1/2013, $300 on 1/1/2014?
12. If you put $1000 into your 14% bank account on 1/1/2012, $2000 on 1/1/2013, and
$3000 on 1/1/2014, when will you get $12668.46?
13. You must pay a creditor $8000 one year from now, $5000 two years from now,
$4000 three years from now, $2000 four years from now. You would like to
restructure the loan into four equal annual payments due at the end of each year. If
the agreed interest rate is 12% compounded annually, what is the payment?
14. You borrow $100,000 from a bank for 30 years at an APR of 10.5%. What is the
monthly payment? If you must pay two points up front, meaning that you only get
$98,000 from the bank, what is the true APR on the mortgage loan
15. Suppose that the mortgage loan described in question 14 is a one-year adjustable
rate mortgage (ARM), which means that the 10.5% interest applies for only the first
year. If the interest rate goes up to 12% in the second year, what will you new
monthly payment be?
16. An investor is looking at a $150,000 house. If 20% must be pay down and the
balance is financed at 12% over the next 30 years. What is the annually mortgage
payment?
17. An investor is looking at a $150,000 house. If 20% must be pay down and the
balance is financed at APR 12% over the next 30 years. What is the monthly
mortgage payment?
18. You have just received a gift of $500 from your grandmother and you are thinking
about saving this money for graduation which is 4 years away. You have your
choice between Bank A which is paying 7% for one – year deposits (compound
interest annually) and Bank B which is paying 6% per year (compound every three
months). What is the future value of your savings one year from today, 4 years from
today if you save your money in Bank A? Bank B? Which is the better decision?
19. Lai’s great aunt left him $20,000 when she died. He can invest the money to earn
12% per year. If he spends $3,540 per year out of this inheritance, how long will the
money last?
20. Mai has three personal loans outstanding to her friend. A payment of $1000 is due
today, a $500 payment is due one year from now and a $250 payment is due two
 years from now. She would like to consolidate the three loans into one, with thirty –
six equal monthly payments, beginning one month from today. Assume the agreed
interest rate is 8% (effective annual rate) per year. How large will the new monthly
payment be?

21. A local bank advertises the following deal: “Pay us $100 a year for 10 years
and then we will pay you (or your beneficiaries) $100 a year forever”. Is this a
good deal if the interest rate available on other deposit is 6%?
22. A local bank will pay you $100 a year for your lifetime if you deposit $2,500 in the
bank today. If you plan to live forever, what interest rate is the bank paying?
23. P&G company shoauld invest in which projects among following projects:
Unit: Million VND

Year 1 Year 2 Year 3

1. When you purchased a house, you took out a $500,000, 30-year monthly-payment
mortgage with an interest rate of 12%. You have now decided to pay the mortgage
off by repaying the outstanding balance. Calculate the annual payment.
What is the payoff amount if:
a. You decided to pay off the mortgage immediately after the 20 th payment is made.

b. You decided to pay off the mortgage immediately before the 25th payment is due.
2. Your parents have deposited $500 into a savings account on since you were born.
Every following year on your birthday your parents have been putting an additional
amount which is 10% higher than the last deposit. Interest rate on the account is 5%,
compounded annually. How much money will be in the account in your 20 th
birthday immediately before your parents makes the deposit on that day?
3. A client has $202971.39 in an account that earns 8% per year, compounded
monthly. The client’s 24th birthday was yesterday and she will retire when the
account value is $1 million.
a. At what age can she retire if she puts no more money in the account?
b. At what age can she retire if she puts $250 per month into the account every month,
beginning one month from today?
4. At retirement nine years from now, a client will have the option of receiving a lump
sum of $400000 or 20 annual payments of $40000, with the first payment made at
retirement. What is annual rate the client would need to earn on a retirement
investment to be indifferent between the two choices?
5. You are buying a car and thinking of taking a one-year installment loan of $1,000 at
an APR of 12% per year to be repaid in 12 equal monthly payments. Estimate the
monthly payment.
The salesperson trying to sell you the car makes the following pitch: “Although the
APR of this loan is 12%, in fact it really works out to be a much lower rate. Because
the total interest payments over the year are only $66.19, and the loan is for $1,000,
you will be only paying a “true” interest rate of 6.62%. What is the fallacy of this
reasoning?
6. You are looking to buy a sports car costing $23,000. One dealer is offering a
special reduced financing rate of 2.9% in the new car purchases for 3-year loans,
with monthly payments. A second dealer is offering a cash rebate. Any customer
taking the cash rebate would, of course, be ineligible for the special loan rate and
would have to borrow the balance of the purchase price from the local bank at 9%
annual rate. How large much the cash rebate on this $23,000 car to entice customer
away from the dealer who is offering the special 2.9%?
7. Which grows to a larger future value, $1000 invested for 2 years at:
a. 10 percent each year
b. 5 percent the first year and 15 percent the second year or
c. 15 percent the first year and 5 percent the second year?
8. The exchange rate between GBP and and USD is currently $1.50 per pound, the
dollar interest rate is 7%, the pound interest rate is 9%. You have $100,000 in a one-
year account that allows you to choose between either currency. If you expect the
GBP/USD exchange rate is $1.40 per pound a year from now on and are indifferent
to risk, which currency you should choose?
9. Vincent Van Gogh sold only one painting during his lifetime, for about $30. A
sunflower still life he painted in 1888 sold for $39.85 million in 1988, more than
three times the highest price paid previously for any work of art. If this painting had
been purchased for $30 in 1888 and sold in 1988 for $39.85 million, what would
have been the annual rate of return?
10.You have been hired as a financial advisor to Michael Jordan. He has received two
offers for playing professional basketball and wants to select the best offer, based on
considerations of money only. Offer A is a $10m offer for $2m a year for 5 years.
Offer B is a $11m offer of $1m a year for four years and $7m in year 5. What is
your advice? (Hint: compare the present value of each contract by assuming a range
of interest rate, say 8% - 14%)
11.What is the price of a 10 year zero coupon bond with redemption value 100 if
the interest rate is assumed to be 6%p.a.?

12. What is the price of a 15 year fixed interest bond with coupons semiannually of
5% and redemption value $100 if interest rates (YTM) are assumed to be 5.5%
p.a.?

13.If a share has an annual dividend with the next dividend being 6.5% in one years
time and dividend growth is assumed to be 3% p.a. What is the fair price of the
share assuming interest rates of 7%p.a. and assuming we hold the share indefinitely?
14.The rental income for a property is $500 p.c.m. (Per Calendar Month) with rent
reviews every 3 years. Assuming that rents will increase by 3% at each rent review
what is the present value of the income stream over the next 30 years assuming
interest rates are 6.5% p.a.?
15.What is the price of a 20 year zero coupon bond with redemption value 100 if the
interest rate is assumed to be 6.5% p.a.?