Topic 2 Exercises

1. Indicate the answer that corresponds to the future value in year 4 of a payment of
€600 at the present time (t = 0), if the discount rate is 5% and the capitalization system
is composite.
a) 600/(1+0.053)
b) 600/1.05
c) 600×1.05×4
d) 600×1.054

2. Assuming simple capitalization and an annual interest rate of 10%, calculate the semi-
annual simple interest.
a) 5%
b) 7.5%
c) Between 4.5% and 4.97%
d) None of the above

3. Determine the semi-annual interest rate equivalent to an annual interest rate of 12%
under compound capitalization:
a) 6%
b) 6.5%
c) It cannot be calculated, data is missing.
d) 5.83%

4. Assuming continuous compounding (continuous interest rate of 5% per annum),

determine the future value in 10 years of a payment of €2,500 made today.
a) Between €4,210 and €4,241
b) Between €4,010 and €4,050
c) Less than 3,500€
d) Between €4,100 and €4,127.

5. Determine the semi-annual interest rate equivalent to a monthly interest rate of 1%

under compound capitalization:
a) 6%
b) 6.5%
c) It cannot be calculated, data is missing.
d) 6.1520%
6- You want to buy a laptop with a price of €1,650, but they offer you the following
payment methods in the store. Select the most convenient one assuming that the
interest rate is 10% at present.
1. Payment in a 1 year for 1,820€
2. Three payments of €605 per semester. The first payment is within 1 year.
3. Four annual payments of €460 with the first payment being right now.

a) Option 1
b) Option 2
c) Option 3
d) Payment of €1,650 in cash.

7. If an investor acquires an investment product that governs compound capitalization

and pays an annual return of 10%, determine the minimum number of years they need
to triple their initial capital
a) 20 years
b) 12 years
c) 11 years
d) Under 11 years

8. An investor can choose between three types of deposits for their savings (€25,000),
indicate which one they should choose if their investment horizon is 8 years.
1. Option 1: Simple compounding with a 7% interest rate
2. Option 2: Compound compounding with an effective interest rate of 6%.
3. Option 3: Compound compounding with a half-yearly interest rate of 2.9%.
a) Option 1
b) Option 2
c) Option 3
d) Option 1 and 3 are the best, you can't distinguish between them.

9. Determine the present value of a perpetual annual annuity of €8,000, assuming an

annual interest rate (or discount rate) of 6%.
a) Under €100,000
b) Between €100,001 and €100,150
c) €133,333.33
d) Between €110,000 and €120,000

10. Determine the present value of a perpetual monthly income of €1,000, assuming an
annual interest rate (or discount rate) of 6%. Suppose that the first payment of this rent
takes place at the beginning of month 5.
a) Less than 200.000€
b) Between €201,470 and €201,495
c) 200,000€
d) Between €205,440 and €205,445
11. Determine the present value of an annuity with 10 payments of €1,000, assuming an
annual interest rate (or discount rate) of 6%. Suppose that the first payment of this rent
takes place right at the present time.
a) Less than 7,500€
b) Between €8,000 and €8,200
c) Between €7,801 and €7,802
d) Between €7,900 and €7,950
Hint: It should be remembered that the formula of a constant annuity
reports the PV a period before the first payment. Therefore, here it will be
necessary to capitalize the result for 1 period, or calculate an annuity of 9
payments and add the payment in t=0.

12. You want to buy a machine that costs €100,000 if you pay in cash. In addition to
being able to pay in cash, the provider offers three different installment payment
options, as indicated below. Determine which payment method is the most
interesting, if the applicable discount rate is 6%.
● Option A: €10,000 in cash, and €90,000 in 6 months.
● Option B: Pay nothing now (€0), and pay €5,000 per month for the next 2 years.
The first payment would take place at the end of this month.
● Option C: A payment of €16,000 semi-annually over 3 years, starting to be paid
at the end of this year (the first payment would take place just one year from
now).

a) Option A
b) Option B
c) Option C
d) Better to pay in cash.

Hint: Be careful in option C if you use the formula of a constant annuity, the
PV is obtained in a period before the first payment, and in this case the
periods are semi-annual.

13. Suppose you inherit €20,000. How would you prefer to be paid if there is a discount
rate (or interest rate) of 6% per year?
a) €20,000 today.
b) 10 annual payments of €2,400, with the first payment within a year.
c) A payment of €24,000 in 3 years and 6 months.
d) 24 semi-annual payments of €1,200 each, the first being in 6 months.
14. In a 10-year mortgage with an initial debt of €50,000 and an interest rate of 4% per
annum, if the mortgage is paid in 10 equal annual instalments, what is the amount of
each payment? What is the outstanding debt on the previous mortgage just after the
payment of the fifth annual installment?
a) Annual fee between €6,160 and €6,169.
b) Annual fee between €5,180 and €5,276.
c) Annual fee between €5,700 and €5,870, with the outstanding debt being €32,670
and €32,690.
d) None of the above.

15. A mortgage with an initial value of €100,000 and with an applicable compound
annual interest rate of 4% will be repaid in 200 monthly payments all of the same
amount, the first of which will occur exactly one month from now. Estimate what the
total monthly payment will be.
a) Between 500€ and 550€
b) Between 575€ and 575€
c) Between 670€ and 690€
d) None of the above

16. A mortgage with an initial value of €100,000 and with an applicable compound
annual interest rate of 4% will be repaid in 200 monthly payments all of the same
amount, the first of which will occur in exactly one month. Calculate what the
outstanding debt will be right after the second of the payments is made.
a) Between 99,300 and 99,310 euros
b) Between 99,335 and 99,340 euros
c) Between 99,205 and 99,210 euros
d) Between 99,285 and 99,295 euros

17. Assume that in the long run the return on investment is k=6%, while the growth rate
of the economy and wages is g=4%. In addition, Carlos inherits an annual income of
30,000 euros at the age of 20 that will grow at the annual rate k and he plans to live off
it, while Juan enters the labor market with an initial annual salary of 30,000 euros that
will also grow at the annual rate g. What will be the present value of the income that
each of them will obtain over the next 50 years if the discount rate is 10%?
a) The present value is €546,235 for Carlos and €505,763 for Juan.
b) The present value is €632,315 for Carlos and €469,730 for Juan.
c) The present value is €752,647 for Carlos and €450,678 for Juan.
d) It cannot be calculated.
18. Suppose that Mrs. Gámez wishes to retire in 22 years' time, and when she retires
she would like to go and live in Menorca. Mrs. Gámez has estimated that the cost of
buying a house in Menorca in 22 years will be €400,000. Determine the amount you
should invest every six months in your pension plan in order to have that amount of
€400,000 at the time of your retirement. Assume that the first payment is made to the
pension plan at the end of this semester, and that the return offered by the pension plan
is 5% per annum.
a) Between €3,500 and €4,000.
b) Between €5,000 and €5,250.
c) More than €6,000.
d) None of the above.

19. Mr. Salinas is 45 years old and when he retires (in 20 years) he wants to buy a boat
that he estimates will cost him €200,000. The bank offers him a pension plan with
quarterly installments that would remunerate the money at 8%. If you subscribe to this
plan, how much should you save each quarter to achieve your goal?
a) Between 500€ and 600€
b) Between 950€ and 1,150€
c) Between €1,350 and €1,670
d) None of the above.

20. Suppose you are going to retire in 30 years and want to take out the following
financial product. You must deposit 4,000 euros annually at the beginning of each year
in your financial institution until the date of your retirement. In return, the bank agrees
to pay you an increasing annual annuity for 20 years after your retirement (the first
payment will be one year after your retirement date, at the beginning of the year). If the
interest rate is 6%, and the annual rent grows by 2% per year, calculate that first
payment of the rent that your bank will make assuming that your life expectancy at this
time is greater than 50 years.
a) Between €23,500 and €24,500
b) Between €24,500 and €25,000
c) Between €29,500 and €30,000
d) None of the above.

Hint: The first deposit of €4,000 takes place right now at t=0.

21. You are contemplating buying a new car and will need to borrow €25,000. The
vehicle dealership has indicated that you can get a 5-year loan with monthly payments
at an annual interest rate of 6%. What would your monthly payment be for the loan?
a) Between 340 and 350 euros.
b) Between 480 and 490 euros.
c) Between 491 and 500 euros.
d) Between 500 and 510 euros.
22. Determine the present value of a financial product that promises to pay €100 at t=1,
and from there it will grow at 5% annually and in perpetuity, if the interest rate (or
discount rate) in this economy is 8%.
a) 3,333.33€
b) 3,000€
c) Between €2,500 and €2,900
d) None of the above

23. How much money will a worker have at the time of retirement if he or she deposits
250 euros per month in a pension plan during the remaining 35 years of active life?
Suppose the first 250 euros are paid within an exact month and the annual discount rate
is 3%.

a) Between 183,000 and 184,000 euros.

b) Between 125,000 and 126,000 euros.
c) Between 59,000 and 60,000 euros.
d) None of the above.

24. Mr Pérez will retire in 30 years and, when this happens, he wants to have an amount
in his pension fund that is equivalent to having a current value of €500,000 today. If the
annual interest rate is 1.5%, how much money do you need to save each year, starting
a year, to achieve your goal?
a) Approximately €19,233.89
b) Approximately €20,819.59
c) Approximately €22,345.72
d) None of the above.

25. You borrow €5,000 at an annual compound interest rate of 3%. This loan will be
repaid with monthly payments over 3 years, all of the same amount X that will include
both the amortization of the principal and the interest. Calculate the value of X assuming
that the first payment takes place at the end of this month.
a) Approximately €129.75
b) Approximately €132.44
c) Approximately €138.24
d) Approximately €145.32

26. You borrow €5,000 at an annual compound interest rate of 3%. This loan will be
repaid with monthly payments over 3 years, all of the same amount X that will include
both the amortization of the principal and the interest. Assuming the first payment takes
place at the end of this month, determine the cost of paying off the loan immediately
after the twentieth payment.
a) Between €2,430 and €2,450
b) Between €2,365 and €2,385
c) Between €2,270 and €2,290
d) None of the above.
27. A two-year master's degree at a university is an expensive investment for students.
To help them, the university is looking at different payment methods. Which option is
the most convenient for students? Assume an annual interest rate of 6%.
a) 6,000 euros at the end of each semester (3 semesters per year)
b) 15,000 euros at the end of each year
c) 1,500 euros per month for the entire study time (2 years).
d) 24,000 euros at the moment (t = 0)

28. Today is January 1, 20XX and you are 30 years old. You have decided to allocate
€2,000 at the end of each year for 37 years in a bank account with an annual
(compounded) interest rate of 1.25% for your retirement plan. The future value of your
retirement will be used to receive a steady annual payment for the next 20 years. What
is the annuity you will receive, taking into account that the annual interest rate is 1.25%?

a) Between 4,850 euros and 4,990 euros.

b) Between 5,250 euros and 5,400 euros.
c) Between 5,500 euros and 5,700 euros.
d) None of the above.