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Review Problems I

1. How much must you deposit today in a bank account paying interest compounded quarterly:
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a) if you wish to have $10,000 at the end of 3 months, if the bank pays 5.0% annual interest rate?
Answer: $9,877
b) if you wish to have $50,000 at the end of 24months, if the bank pays 8.0%annual interest rate?
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. Answer: $42,675
c) if you wish to have $6,000 at the end of 12 months, if the bank pays 9.0% annual interest rate?
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.
Answer: $5,489

2. How much must you deposit today in a bank account paying interest compounded monthly:

a) if you wish to have: $10,000 at the end of 1 month, if the bank pays 5.0% annual interest rate ?
Answer: $9,959
b) if you wish to have: £6,000 at the end of 6 months, if the bank pays 9.0% annual interest rate ?
Answer: £5,737
c) if you wish to have: $12,000 at the end of 12 months, if the bank pays 6.0% annual interest rate ?
Answer: $11,303
3. If interest is compounded quarterly, how much will you have in a bank account:

a) if you deposit today £8,000 at the end of 3 months, if the bank pays 5.0% annual interest rate ?
Answer: £8,100
b) if you deposit today $10,000 at the end of 6 months, if the bank pays 9.0% annual interest rate ?
Answer: $10,455
c) if you deposit today ¥80,000 at the end of 12 months, if the bank pays 8.0% annual interest rate ?
Answer: ¥86,595
d) if you deposit today $5,000 at the end of 24 months, if the bank pays 5.0% annual interest rate ?
Answer: $5,522

4. If interest is compounded monthly, how much will you have in a bank account,

a) if you deposit today £8,000 at the end of 3 months, if the bank pays 5.0% annual interest rate ?
Answer: £8,100 ~

b) if you deposit today $10,000 at the end of 6 months, if the bank pays 9.0% annual interest rate ?
Answer: $10,459
c) if you deposit today ¥80,000 at the end of 12 months, if the bank pays 8.0% annual interest rate ?
Answer: ¥86,640
d) if you deposit today £5,000 at the end of 24 months, if the bank pays 5.0% annual interest rate ?
Answer: £5,525

5. Suppose you make an investment of $1,000. This first year the investment returns 12%, the second year it
returns 6%, and the third year in returns 8%. How much would this investment be worth, assuming no
withdrawals are made?
Answer:
1000*(1.12) x (1.06) x (1.08)
= $1,282

6. Suppose you make an investment of $10,000. This first year the investment returns 15%, the second year
it returns 2%, and the third year in returns 10%. How much would this investment be worth at the end of
three years, assuming no withdrawals are made?

$12,903
 2

Review Problems II

1. What is the present value of a stream of $2,500 semiannual payments received at the end of each period for
the next 10 years? The annual interest rate is 6%.
a. 37,194 c. 35,810
b. 38,310 d. 36,885

2. What is the future value in 10 years of $1,500 payments received at the end of each year for the next 10
years? Assume an interest rate of 8%.
a. $25,260 d. $18,395
b. $23,470 e. $15,000
c. $21,730

3. You open a savings account that pays 4.5% annually. How much must you deposit each year in order to
have $50,000 five years from now?
a. $8,321 d. $9,140
b. $9,629 e. $6,569
c. $8,636

4. You are saving up for a down payment on a house. You will deposit $600 a month for the next 24 months
in a money market fund. How much will you have for your down payment in 24 months if the fund earns
10% annual interest rate compounded monthly?
a. $14,480 d. $10,560
b. $15,870 e. $ 9,890
c. $12,930

5. Your mortgage payment is $600 per month. There is exactly 180 payments remaining on the mortgage.
The interest rate s 8.0%, compounded monthly. The first payment is due in exactly one month. What is
the balance of the loan? [Balance = PV of remaining payments.]
a. $62,784 d. $82,502
b. $77,205 e. $85,107
c. $63,203

6. Your mortgage payment is $755 per month. It is a 30-year mortgage at 9.0% compounded monthly. How
much did you borrow?
a. $93,800 d. $85,100
b. $97,200 e. $89,400
c. $92,500

7. What is the present value of $2,500 semiannual payments received at the beginning of each period for the
next 10 years? The annual interest rate is 6%.
a. 37,194.70 c. 35,809.50
b. 38,309.50 d. 36,884.80

8. Your mortgage payment is $600 per month. There are exactly 180 payments remaining on the mortgage.
The interest rate s 8.0%, compounded monthly. The next payment is due immediately. What is the
balance of the loan? [Hint: This is an annuity due.]
a. $63,203 d. $82,502
b. $77,205 e. $85,107
c. $62,784

9. Deryl wishes to save money to provide for his retirement. Beginning one year from now, he will begin
depositing the same fixed amount each year for the next 30 years into a retirement savings account.
Starting one year after making his final deposit, he will withdraw $100,000 annually for each of the
following 25 years (i.e. he will make 25 withdrawals in all). Assume that the retirement fund earns 12%
annually over both the period that he is depositing money and the period he makes withdrawals. In order
for Deryl to have sufficient funds in his account to fund his retirement, how much should he deposit
annually (rounded to the nearest dollar)?
a. $97,368 d. $2,730
b. $2,902 e. $3,640
c. $3,250