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Solution of Assignment On Time Value of Money

This document contains questions related to time value of money concepts. It includes questions about effective annual rates for different compounding periods, equivalent cash flows using present value calculations, annuity withdrawal amounts, loan repayment amounts, and savings amounts needed for future payments. The questions cover topics such as compound interest, present and future value of annuities, loans, and savings plans.

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Arif Rahman
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217 views11 pages

Solution of Assignment On Time Value of Money

This document contains questions related to time value of money concepts. It includes questions about effective annual rates for different compounding periods, equivalent cash flows using present value calculations, annuity withdrawal amounts, loan repayment amounts, and savings amounts needed for future payments. The questions cover topics such as compound interest, present and future value of annuities, loans, and savings plans.

Uploaded by

Arif Rahman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment on Time value of Money

PART I

1. Which of the following investments provides an investor with the lowest effective annual
return?
A. An investment which has a 10% APR compounded daily.
B. An investment which has a 10% APR compounded monthly.
C. An investment which has a 10% APR continuously compounded.
D. An investment which has a 9% APR compounded monthly.
E. An investment which has a 9% APR compounded quarterly.

2. If you were to choose between two investment alternatives: A or B. A pays $2,000 a year
for 20 years starting at the end of this year. B pays $1,000 a year forever starting at the
end of this year. At what interest rate both alternatives A and B would be equivalent to
you?
A. 0%
B. 7.1773%
C. 3.5265%
D. 1.2869%
E. No such interest rate exists.

A B
PMT=2000 [Ordinary Annuity] 1000 (Perpetual Cashflow, It has no maturity)
N=20
At what interest rate both alternatives A and B would be equivalent to you?

PV (A) = PV (B) at what interest rate these two investment is equal?


You will be receiving a series of 10 annual equal payments of $10,000 starting at the end of this
year. You will invest these payment in a bank that is paying a 5% APR compounded quarterly.
You will be withdrawing yearly amounts from these 10 payments at the end of each period.
Every year you will withdraw 2% more than the previous year. If at the end of 10 years
you still have $50,000. How much was your first withdrawal?

A. $3,3333.63
B. $7,633.51
C. $6,335.10
D. $5,563.07
E. $4,2395.35

PMT =10,000
N=10
EAR = [m=4 f=1, since it’s an effective annual rate]

Suppose, withdraw PMT (year 1) =20,000, PMT (year 1) =20,000 x 1.02= 20400
You took a $20,000 car loan from your bank. You will repay this loan in 48 equal monthly
payments. The bank is charging you an APR of 12% compounded bi-weekly. What fraction of
payment made by the end of the second year will represent repayment of principal.
F. 55.69%
G. 63.24%
H. 77.93%
I. 82.48%
J. None of the Above
You have won $20,000,000 in a lottery. You felt relieved and decided to take an early
retirement: sit and enjoy life. You have deposited your money at the Bank paying you an APR of
3.6% compounded monthly. How much can you withdraw every year so that you will still have
$200,000 after 100 years (pick the nearest answer).
K. $534,487
L. $659,674
M. $752,456
N. $824,356
O. $954,872
Sam is a lucky student. Hi dad, mum, and grandpa have decided to give him money because he is
studying. His dad will give him $200 every week for the coming 4 years. His mum will give him
$300 every 2 weeks for the coming 4 years. His grandpa will give him $400 every month for the
coming 4 years. If the current discount rates are 3.6% APR compounded monthly. What is the
current value of the total amount of money that Sam will be receiving in the coming four years?
a) 17,856
b) 29,040
c) 38,734
d) 67,774
e) 85,631
A 0.5% effective monthly rate is equivalent to what rate effective bi-annually?
A. 1.206%
B. 1.271%
C. 12.06%
D. 12.71%
E. 12.45%
You are planning to retire 40 years from now. Once you retire you will be withdrawing $60,000
at the beginning of every year and for another 40 years. To make your retirement plans and for
the coming 40 years, you will start depositing at the end of every year a certain amount of money
in your bank account. Since you are expecting that your salary will grow by 1% every year for
the coming 40 years than you expect your yearly savings to grow by the same rate. If your bank
is paying you 6% APR compounded monthly. What should be your first deposit so that you can
achieve your retirement plan?
A. $4,152
B. $4,546
C. $4,824
D. $5,122
E. $5,565
You are required to make following payments in the coming 13 years:

i. $15,000 every four years starting one year from today and ending in year 13 (4 payments)
ii. $10,000 every three years starting one year from today and ending in year 13 (5 payments)
iii. $5,000 every two years starting one year from today and ending in year 13 (7 payments)
iv. $1,000 every year starting by the end of year 1 and ending in year 13 (13 payments)

How much should you deposit now in your bank account for you to be able to make these
payments on time if your bank will give you an interest of 5% APR compounded monthly
(pick the nearest answer)?
A. 107,658.44
B. 113,932.54
C. 119,420.86
D. 125,369.98
E. 133,452.89
Part II

From the text book

4-23 to 4-26, 4-29, 4-30, 4-33, and mini case

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