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Practices: Time Value of Money

This document contains 8 questions related to time value of money concepts. Question 1 asks about the loan amortization schedule and principal repayment fraction for a $500,000 loan. Question 2 calculates the future value of 3 annual $20,000 payments received over 6 years. Question 3 compares equivalent nominal interest rates for monthly vs quarterly compounding loans. Question 4 calculates an equivalent monthly interest rate for a loan with a 15% quarterly nominal rate. Question 5 provides details on a 30-year, $200,000 mortgage with 7.5% monthly interest. Question 6 calculates how long it will take to reach a $1 million investment goal with annual $7,500 contributions and 6% nominal returns. Question 7 uses

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288 views

Practices: Time Value of Money

This document contains 8 questions related to time value of money concepts. Question 1 asks about the loan amortization schedule and principal repayment fraction for a $500,000 loan. Question 2 calculates the future value of 3 annual $20,000 payments received over 6 years. Question 3 compares equivalent nominal interest rates for monthly vs quarterly compounding loans. Question 4 calculates an equivalent monthly interest rate for a loan with a 15% quarterly nominal rate. Question 5 provides details on a 30-year, $200,000 mortgage with 7.5% monthly interest. Question 6 calculates how long it will take to reach a $1 million investment goal with annual $7,500 contributions and 6% nominal returns. Question 7 uses

Uploaded by

sovuthy
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Practices

TIME VALUE OF MONEY


Question 1

Your company is planning to borrow $500,000 or a


5-year, 7%, annual payment fully amortized term
loan. Write the loan amortization schedule. What
fraction of the payment mode at the end of the
second year will represent repayment of principal?
Question 2 (CFA level1)

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
investments and she plans to retire in six years. How
much will the three business project payments be
worth at the time of her retirement?
Question 3

Your firm can borrow from its bank for one month.
The loan will have to be “rolled over” at the end of
the month, but you are sure the rollover will be
allowed. The nominal interest rate is 14%, but
interest will have to be paid at the end of each
month, so the bank interest rate is 14%, monthly
compounding. Alternatively, your firm can borrow
from an insurance company at a nominal rate that
would involve quarterly compounding. What
nominal quarterly rate would be equivalent to the
rate charged by the bank?
Question 4

You plan to buy a new HDTV. The dealer offers to


sell the set to you on credit. You will have 3 months
in which to pay, but the dealer says you will be
charged a 15% interest rate; that is, the nominal rate
is 15%, quarterly compounding. As an alternative to
buying on credit, you can borrow the funds from
your bank, but the bank will make you pay interest
each month. At what nominal bank interest rate
should you be indifferent between the two types of
credit?
Question 5

The Wade family is interested in buying a home. The


family is applying for a $200,000 30-year mortgage.
Under the terms of the mortgage, they will receive
$200,000 today to help purchase their home. The
loan will be fully amortized over the next 30 years.
Current mortgage rates are 7.5%. Interest is
compounded monthly and all payments are due at
the end of the month.
Question 6

Janet has been given $15,000 by her grandparents


today on their 21st birthdays. She wants to save for
her future and has aspirations of one day being
millionaires. She plans to make annual contributions
on her birthday, beginning next year. Janet has
opened investment accounts at the 1st National Bank
and she expects to earn nominal returns of 6%. Janet
has already decided to deposit $7,500 each year into
her investment account. How many years will it take
Janet before she reaches her investment goal of $1
million?
Question 7

Henry has saved $5,000 and intends to use his


savings as a down payment on a new car. After
careful examination of his income and expenses,
Henry has concluded that the most he can afford to
spend every month on his car payment is $425. The
car loan that Henry uses to buy the car will have an
APR of 10%.
Question 8

 Assume that you have $15,000 in a bank account that pays 5%


annual interest. You plan to go back to school for a
combination MBA/law degree 5 years from today at Harvard
Business School. It will take you an additional 5 years to
complete your graduate studies. You figure you will need a
fixed income of $25,000 in today’s dollars; that is, you will
need $25,000 of today’s dollars during your first year and
each subsequent year. (Thus, your real income will decline
while you are is school.) You will withdraw funds for your
annual expenses at the beginning of each year. Inflation is
expected to occur at the rate of 3% per year. How much must
you save during each of the next 5 years in order to achieve
your goal? The first increment of savings will be deposited one
year from today.

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