TUTORIAL QUESTIONS

WMBA (FINANCE)

TIME VALUE OF MONEY

1. If we deposit $5,000 today in an account paying 10%, how long does it take to grow to
$10,000?
2. Assume the total cost of a college education will be $50,000 when your child enters
college in 12 years. You have $5,000 to invest today. What rate of interest must you earn
on your investment to cover the cost of your child’s education?
3. Find the Effective Annual Rate (EAR) of an 18% Annual Percentage Rate (APR) loan
that is compounded monthly.
4. You have a credit card with a quoted annual percentage rate of 17.9%. Interest is applied
to your account monthly. What is the effective annual rate?
5. What is the value of a British consol that promises to pay £15 every year forever? The
interest rate is 10-percent.
6. Suppose some worthy person wishes to endow a chair in finance at your university. If the
rate of interest is 10 percent and the aim is to provide $100,000 a year forever, the
amount that must be set aside today is?
7. If a perpetuity pays $10 per year and you can buy it for $100. What is the interest rate on
perpetuity
8. The expected dividend next year is $1.30, and dividends are expected to grow at 5%
forever. If the discount rate is 10%, what is the value of this promised dividend stream?
9. Kangaroo offers an “easy payment” scheme of $4,000 a year at the end of each of the
next 3 years, if the interest rate is 10%. Calculate the present value of annuity?
10. If you can afford a $400 monthly car payment, how much car can you afford if interest
rates are 7% on 36-month loans?
11. In May 1992, a 60-year-old nurse plunked down $12 in a Reno casino and walked away
with the biggest jackpot to that date—$9.3 million. We suspect she received unsolicited
congratulations, good wishes, and requests for money from dozens of more or less
worthy charities, relatives, and newly devoted friends. In response she could fairly point
out that her prize wasn’t really worth $9.3 million. That sum was to be paid in 20 annual
 installments of $465,000 each. What is the present value of the jackpot? The interest rate
at the time was about 8 percent.
12. A defined-benefit retirement plan offers to pay $20,000 per year for 40 years and increase
the annual payment by 3% each year. What is the present value at retirement if the
discount rate is 10%?
13. You will receive $12,000 a year for the next ten years from a trust fund your grandmother
is establishing. What is this gift worth today at a 9% discount rate?
14. You are buying some land from your parents today. You agree to pay them $5,000 a year
for six years. The first payment is due today. What is the actual selling price of the land if
your parents are only charging you 3% interest?
15. You are back in savings mode again. This time you are setting aside $3,000 at the end of
every year in order to buy a car. If your savings earn interest of 8 percent a year, how
much will they be worth at the end of 4 years?
16. You are planning on investing $3,500 in the stock market every year for your retirement.
You will make your first investment at the end of this year. The average rate of return
you expect to earn is 7%. How much money do you expect to have when you retire forty
years from now?
17. In only 50 more years, you will retire. (That’s right—by the time you retire, the
retirement age will be around 70 years. Longevity is not an unmixed blessing.) Have you
started saving yet? Suppose you believe you will need to accumulate $500,000 by your
retirement date in order to support your desired standard of living. How much must you
save each year between now and your retirement to meet that future goal? Let’s say that
the interest rate is 10 percent per year. You need to find how large the annuity in the
following figure must be to provide a future value of $500,000.
18. Your parents are giving you $3,000 at the beginning of each year for four years. You are
saving this money and earning a 2.5% rate of return on your savings. How much money
will you have at the end of the four years?

19. The holder of our 6 percent Treasury bond receives a level stream of coupon payments of
$60 a year for each of 3 years. At maturity the bondholder gets an additional payment of
$1,000.
20. A bond has a 9% coupon rate, matures in 12 years and pays interest semi-annually. The
face value is $1,000. What is the current price of this bond if the market rate of return is
8.3%?
21. Find the value of a 30-year zero-coupon bond with a $1,000 par value and a YTM of 6%.
22. Consider government bond with a 6 3/8% coupon that expires in December 2010. The
bond was issued on January 1, 2006 and the required annual yield is 5%. The Par Value
of the bond is $1,000. Coupon payments are made semi-annually (June 30 and December
31 for this particular bond). Since the coupon rate is 6 3/8%, the payment is $31.875.
23. Consider a bond with a 10% annual coupon rate, 15 years to maturity, and a par value of
$1,000. The current price is $928.09.
24. Suppose a bond with a 10% coupon rate and semiannual coupons has a face value of
$1,000, 20 years to maturity, and is selling for $1,197.93.
25. Suppose a Treasury bill with 91 days maturity was bought at a price of GH¢970. If the
bill has GH¢1000 face value, the annualized discount yield will be?
26. T-bill with 91days to maturity, 100,000 face value with a discount of 9,000 will have an
annualized bank discount of?
27. Suppose a Treasury bill with 182 days maturity has face value of GH¢1000. If the
discount yield is 13%, what is the discount amount in cedis and price of the Treasury
bill?