TCH 302 – PRINCIPLES OF FINANCE

TUTORIAL 2

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?
FV=1000*1.1^20=6727,499499
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?
FVA=100*57.275 (FVFA, 10%, 20)*1.1=8500,248
How much must you invest each year if you want to have $50000 at the end of the 20
years? CF=50000/(FVFA, 10%, 20)=872,981
3. If you borrow $10,0000 from a bank for 30 years at an APR of 13%, monthly payment,
what will EFF be? EFF=(1+APR/12)^12-1=13,803%
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.
PV=100/(1+0.1)^5=62.09
b. $100 received 60 years from now.
PV= 100/1.1^60=0.328
c. $100 received each year beginning one year from now and ending 10 years from now.
PV=100*PVAD (10%,10)=196.921
d. $100 received each year for 10 years beginning now.
PV=100*PVAD(10%,10)*1.1=675,902
e. $100 each year beginning one year from now and continuing forever.
PV=100/10%=1000
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?
Principal = 1000/10%=10000
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?
CF= 100000/PVAD (16%, 12*25)=1358,888
b. If you can only afford to pay $1,000 per month, how large a loan could you take?
PV=1000*FVAD(16%,12*25)=73589.534
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?
i=1500*12/100000= 1.5%/months
PV=CF * 1-(1+r)^-n/r => n = 10^7 ???
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?
1,481
7. In 1626, Peter Minuit purchased 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?
2.603*10^14
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%?
50000*PVAD(8%, 20) = 490907.37
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?
20000(1+12%)^n=3540*FVAD(12%,n)
PV=(3540/0.12)(1-1/(1+0.12)^n)=20000
n=10
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.
1739,4825-2000=-260.517
NPV=200/(1+0,14)+980/(1+0.14)^2+1200/(1+0.14)^3+1200/(1+0.14)^4-
2000=449.9789
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?
100 (1+12%)^4 + 200 (1+12%)^3+300(1+12%)^2=814.657
FV= 100(1+0.12)^4+200(1+0.12)^3+300(1+0.12)^2=814.657
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?
12668.46=1000(1.14)^(n-2012) + 2000(1.14)^(n-2013) + 3000(1.14)^(n-
2014)=12668.46
n=2019
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?
Today Year 1 Year 2 Year 3 Year 4
$8000 $5000 $4000 $2000
CF CF CF CF???
PV=15246.9836=c/0.12(1-1/(1+0.12)^4) ; CF = = 5019,83
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?
C=914.7392
APR=10.749%
15. Suppost 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?
 1. You borrow $100,000 from a bank for 30 years at an APR of 10.5%. Suppost 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? (Question 15 – Tutorial 3) Commented [MLC1]: Câu trả lời này không đúng em nhé.
1. Hai khoản C này là khác nhau.
2. Số tiền gốc phải trả ở hai cách trả tiền là khác nhau.
ĐS: C với lãi suất 10.5%/năm, trả theo tháng là 914,74
=PMT(0.105/12,360,100000,0,0)
C với lãi suất 12%/năm, trả theo tháng trong 29 năm là
1027.19

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?
12000= C/0.12(1-1/(1+0.12)^30)
C=14897.23891
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?
PV=  0.8* $150,000 =
 CF = $ 1,234
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?
Bank A:
After 1 year: FV1A = $500 (1 + 0.07) = $535
After 4 years: FV1A = $500 = $655.4
Bank B:
After 1 year: FV1A = $500 = $530.68
After 4 years: : FV1A = $500 = $634.49
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?
PV=(3540/0.12)(1-1/(1+0.12)^n)=20000
n=10
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?
 $1000 + $500 / + $250 / =
 CF = $ 52.483
APR= 7.72% PV=1677.2976 C=52.344
21. Larry’s bank account has a “floating” interest rate on certain deposits. Every year the
interest rate is adjusted. Larry deposited $20,000 three years ago, when interest rates were
7% (annual compounding). Last year, the rate was only 6%, and this year the rate fell
again to 5%. How much will be in his account at the end of this year?
At the end of this year = $20,000 = $23,818.2
22. 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%?
The value of your investment:
PV = = 736.01
The present value of your receipts is the value of a $100 perpetuity deferred for 10
years
● The value of your beneficiaries:
PV= $ 930,658
23. 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?

PV = $2,500 = => i = 4%
24. P&G company should invest in which projects among following projects:
Unit: Million VND

Year 1 Year 2 Year 3

Revenue Cost Revenue Cost Revenue Cost

Project 1 800 500 1000 500 1200 600

Project 2 300 100 300 150 500 200

Project 3 1200 600 1200 600 1200 600

Project 4 500 200 600 250 800 350

IR is 10% per year.

NPV1=1136.739294
NPV2=531.1795642
NPV3=1492.111195
NPV4=900.0751315
=>Project 3
25. 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.
PV = = CF = $36,324.456
What is the payoff amount if:
a. You decided to pay off the mortgage immediately after the 20th payment is made.
After the 20th payment is made: Principal -
= $500,000 = $267,351
FV(500000)-FV(C)=267351.1564
b. You decided to pay off the mortgage immediately before the 25th payment is due.
Before the 20th payment is made: Principal -
= $500,000 = $303,676
303675.6122
What is the interests paid in the 21th payment:
267351.1564 * 0.06 = 1605.069384
26. 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?
The account in your 20th birthday immediately before your parents makes the deposit on
that day: $500
27. 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?
$1,000,000 = $202,971.39  n = 240 months = 20 years
b. At what age can she retire if she puts $250 per month into the account every month,
beginning one month from today?
$1,000,000 = $202,971.39 +
 n = 220.025 months = 18.335 years

28. 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?
 3. 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? (Question 28 – Tutorial 3) Commented [MLC3]:Câu trả lời này đúng.

29. 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.
C= 88.84
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?
The fallacy is that with your first monthly payment (and each subsequent payment)
you are paying not only interest on the outstanding balance, you are also repaying
part of the principal. The interest payment is due at the end of the first month is 1%
of $1,000 or $10. Because your monthly payment is $88.85, the other $78.85 is
repayment of principal
EAR =
$1,000 = $126.825

30. 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%?
To entice customer away from the dealer who is offering the special 2.9%:
($23,000 – x) < $23,000  x > $3,829.038

Sai. FV Principal này không có ý nghĩa. Đáp án là số tiền mặt khuyễn mãi trong trường hợp trả theo hàng năm, lãi suất 9%
phải lớn hơn con số 3627.47 để khách hàng sẽ bỏ lựa chọn 1, trả theo tháng, lãi suất 2.9%/năm.
31. Which grows to a larger future value, $1000 invested for 2 years at:
a. 10 percent each year 1210
b. 5 percent the first year and 15 percent the second year or 1207.5
c. 15 percent the first year and 5 percent the second year? 1207.5
32. 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?
33. 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?
I=0.284%
34. 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%)
I= 0.08
Offer A:
PV= 7.98542m
Offer B:
PV=8.0762m
35. 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.?
P = 100/1.06^10 = 55.83947
36. 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.?
Coupon=100*(0.05*2)=10
Price= (10/(0.055)(1-1/(1+0.055)^30)+100/(1+0.055)^30=145.169

37. If a share has an annual dividend with the next dividend being 6.5 in one year 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?
P=6.5/(0.07-0.03)=162.5
38. 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.?
 Commented [MLC4]: Câu trả
lời này không đúng.
Lí do: em xem lại số kì sẽ chiết khấu của dòng tiền, mỗi ba năm thì số kì chiết khấu đều giống nhau là
36 kì. Sau đó em phải chia PV của ba năm một về năm t0, tức là mẫu số của dòng tiền từ năm 2 phải
là (1+0.065)^36,
(1+0.065)^72,

39. 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.?

P=100/(1.065)^20=28.3797