HomeWork1 - Financial Markets and Institutions (MGT 470)...

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Financial Markets and Institutions (MGT 470) Time Value of Money (TVM) Homework Assignment I (Solutions) Please solve the following problems using either TVM formulas or the financial calculator. Show all your formula work. If you use the calculator, show the relevant calculator inputs. Where MS Excel is required, please either cut and paste the spreadsheet where it belongs or staple the printout directly from MS Excel. For spreadsheets that are too long to print, just include a sample printout of the first and last pages. Always highlight or underline the final answer to each question. Note that some questions require a written answer, not just a number. 1. If you deposit $100,000 in a bank savings account that pays 3.5% with annual compounding of interest, how much money will be in your account after 5 years? The timeline would look like: 0 3.5% 1 2 3 4 5 | | | | | | PV = -$100,000 FV 5 = ? This gives us the inputs for the FV formula: FV = $100,000(1.035) 5 = $100,000(1.18768630565) = $118,768.63 With the calculator, you can also input: N = 5 ; I% = 3.5 ; PV = 100,000 ; Solve for FV. I’ll have $118,768.63 in five years . 2. Ben Collins plans to buy a house today for $250,000. If that property is expected to increase in value 5 percent each year, what would its value be seven years from now? The timeline would look like: 0 5% 1 2 3 4 5 6 7 | | | | | | | | PV =-$250,000 FV 7 = ? This gives us the inputs for the FV formula: FV = $250,000(1.05) 7 = $250,000(1.4071) = $351,775.11
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- 2 of 19 - With the calculator, you can also input: N = 7 ; I% = 5 ; PV = 250,000 ; Solve for FV. It’s value will be $351,775.11 in seven years . 3. What is the present value of a security that promises to pay you $150,000 in 15 years? Assume that you can earn 5 percent if you were to invest in another security of equal risk. The timeline would look like: 0 5% 1 2 15 | | | | PV = ? FV 15 = $150,000 This gives us the inputs for the PV formula: PV = $150,000/(1.05) 15 = $150,000/(2.07892817941) = $72,152.56 With the calculator, you can also input: N = 15 ; I% = 5 ; FV = 150,000 ; Solve for PV. It’s present value is $ 72,152.56 . 4. Find the present value equivalent of $50,000 you expect to receive five years from now under each of the following discount rates: a) 12 percent interest, compounded annually. With the calculator, you can just input: N = 5 ; I% = 12 ; FV = 50,000 ; Solve for PV. PV = $28,371.34 b) 12 percent interest, compounded semiannually. With the calculator, you can just input: N = 10; I% = 6 ; FV = 50,000 ; Solve for PV. PV = $27,919.74 c) 12 percent interest, compounded quarterly. With the calculator, you can just input: N = 20 ; I% = 3 ; FV = 50,000 ; Solve for PV. PV = $27,683.79
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This note was uploaded on 04/17/2008 for the course MGMT 470 taught by Professor Camargo during the Spring '08 term at New Mexico.

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HomeWork1 - Financial Markets and Institutions (MGT 470)...

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