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Quantitative Methods Module 1 The Time Value of Money

The document outlines various financial scenarios involving the time value of money, including investment calculations, compounding interest, and present value assessments. It presents problems related to portfolio growth, bond investments, savings for future expenses, and comparisons between annuities and lump sums. Each scenario requires applying quantitative methods to estimate future values, effective annual rates, and necessary contributions for financial goals.

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j3172711
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37 views3 pages

Quantitative Methods Module 1 The Time Value of Money

The document outlines various financial scenarios involving the time value of money, including investment calculations, compounding interest, and present value assessments. It presents problems related to portfolio growth, bond investments, savings for future expenses, and comparisons between annuities and lump sums. Each scenario requires applying quantitative methods to estimate future values, effective annual rates, and necessary contributions for financial goals.

Uploaded by

j3172711
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Quantitative Methods Module 1 the time value of money

1. A client has a $5 million portfolio and investments 5% of it in a money


market fund project to earn 3% annually. Estimate the value of this portion
of his portfolio after seven years.
2. A client invests $500,000 in a bond fund projected to earn 7% annually.
Estimate the value of her investment after 10 years.
3. For liquidity purposes, a client keeps $100,000 in a bank account. The bank
quotes a stated annual interest rate of 7%. The bank’s service representative
explains that the stated rate is the rate one would earn if one were to cash out
rather than invest the interest payments. How much will your client have in
his account at the end of one year, assuming no additions or withdrawal,
using the following types of compounding? Calculate the corresponding
effect annual rate.
a. Quarterly
b. Monthly
c. Continuous
4. A bank quotes a rate of 5.89% with an effective annual rate of 6.05 percent.
Does the bank use annual, quarterly, or monthly compounding?

5. A bank pays a stated annual interest rate of 8%. What is the effective annual
rate using the following types of compounding?
a. Quarterly
b. Monthly
c. Continuous

6. A couple plans to set aside $20,000 per year in a conservative portfolio


projected to earn 7% a year. If they make their first savings contribution one
year from now, how much will they have at the end of 20 years?

7. Two years from now, a client will receive the first of three annual payments
of $20,000 from a small business project. If she can earn 9% annually on her
investment and plans to retire in six years, how much will the three business
project payments be worth at the time of her retirement?

8. To cover the first year’s total college tuition payments for his two children, a
father will make a $75,000 payment five years from now. How much will he
need to invest today to meet his first tuition goal if the investment earns 6%
annually?
9. A client has agreed to invest €100,000 one year from now in a business
planning to expand, and she has decided to set aside the funds today in a
bank account that pays 7 percent compounded quarterly. How much does she
need to set aside?

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Quantitative Methods Module 1 the time value of money

10.A client can choose between receiving 10 annual $100,000 retirement


payments, starting one year from today, or receiving a lump sum today.
Knowing that he can invest at a rate of 5 percent annually, he has decided to
take the lump sum. What lump sum today will be equivalent to the future
annual payments?

11.A perpetual preferred stock position pays quarterly dividends of $1,000


indefinitely. If an investor has a required rate of return of 12 percent per year
compounded quarterly on this type of investment, how much should he be
willing to pay for this dividend stream?

12.At retirement, a client has two payment options: a 20-year annuity at


€50,000 per year starting after one year or a lump sum of €500,000 today. if
the client’s required rate of return on retirement fund investments is 6
percent per year, which plan has the higher present value and by how much?

13. You are considering investing in two different instruments. The first
instrument will pay nothing for three years, but then it will pay $20,000 per
year for four years. The second instrument will pay $20,000 for three years
(at t=1) and $30,000 in the fourth year. All payments are made at year-end. if
your required rate of return on these investments is 8 percent annually, what
should you be willing to pay for:
A. The first instrument?
B. The second instrument (use the formula for a four-year annuity)?

14. Suppose you plan to send your daughter to college in three years. you
expect her to earn two-thirds of her tuition payment in scholarship money, so
you estimate that your payments will be $10,000 a year for four years. to
estimate whether you have set aside enough money, you ignore possible
inflation in tuition payments and assume that you can earn 8 percent
annually on your investments. how much should you set aside now to cover
these payments?

15. A client is confused about two terms on some certificate-of-deposit rates


quoted at his bank in the United States. You explain that the stated annual
interest rate is an annual rate that does not take into account compounding
within a year. The rate his bank calls APY (annual percentage yield) is the
effective annual rate taking into account compounding. The bank’s customer
service representative mentioned monthly compounding, with $1,000
becoming $1,061.68 at the end of a year. To prepare to explain the terms to
your client, calculate the stated annual interest rate that the bank must be
quoting.

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Quantitative Methods Module 1 the time value of money

16. A client seeking liquidity sets aside €35,000 in a bank account today. The
account pays 5 percent compounded monthly. Because the client is
concerned about the fact that deposit insurance covers the account for only
up to €100,000, calculate how many months it will take to reach that amount.

17. A client plans to send a child to college for four years starting 18 years from
now. Having set aside money for tuition, she decides to plan for room and
board also. She estimates these costs at $20,000 per year, payable at the
beginning of each year, by the time her child goes to college. If she starts
next year and makes 17 equal payments into a savings account paying 5
percent annually, what annual payments must she make?

18. A couple plans to pay their child’s college tuition for 4 years starting 18
years from now. The current annual cost of college is c$7,000, and they
expect this cost to rise at an annual rate of 5 percent. in their planning, they
assume that they can earn 6 percent annually. How much must they put aside
each year, starting next year, if they plan to make 17 equal payments?

19. You are analyzing the last five years of earnings per share data for a
company. The figures are $4.00, $4.50, $5.00, $6.00, and $7.00. At what
compound annual rate did EPs grow during these years?

20.Toyota Motor Corporation had consolidated vehicle sales of 7.35 million


units in 2012. This is substantially less than consolidated vehicle sales of
8.52 million units five years earlier in 2007. What was the growth rate in
number of vehicles sold by Toyota from 2007 to 2012?

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