Chapter 2 Class Problems and Solutions

Chapter 2 Class Problems and Solutions - CHAPTER 2 CLASS...

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CHAPTER 2 CLASS PROBLEMS 1. You want to borrow $10,000. The interest rate is 15%. You plan to borrow the money for one year. What is the amount of interest you will have to pay one year from now? SOLUTION: SI = PV x i x N = $10,000 x .15 x 1 = $1500 2. How much will $20,000 deposited in an investment account earning a compound annual interest rate of 15% be worth one year from today? SOLUTION: FV 1 = PV (1 + i) = $20,000(1 + .15) = $23,000 3. How much will $1,000 deposited in a savings account earning a compound annual interest rate of 6% be worth at the end of the following number of years? a. 3 years b. 5 years c. 10 years SOLUTION: a. FV 3 = $1,000(1 + .06) 3 = $1,191.02 b. FV 5 = $1,000(1 + .06) 5 = $1,338.23 c. FV 10 = $1,000(1 + .06) 10 = $1,790.85 4. If you require a 9% return on your investment, which would you prefer? a. $5,000 today b. $15,000 five years from today SOLUTION: a. PV of $5,000 = $5,000 b. PV of $15,000 received in 5 years at 9 %: PV = $15,000 / (1 + .09) 5 = $9,748.99
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Answer is $9,748.99 5. a) What is the net present value of a firm’s investment in a U.S. Treasury bill yielding 5% and maturing in one year? Ignore taxes. SOLUTION: The face value of the treasury security is $1,000. If this security earns 5%, then in one year we will receive $1,050.
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