3
This payment contains the interest owed at the end of the year as well as an amount to repay the
principal.
For instance, from the end-of-year payment of $2498 in year 1, an amount of $720
covers the interest due on the balance owed at the beginning of the year (i.e. 12% of $6000), and
the remainder, i.e. [2498 - 720] or $1778, is applied to the reimbursement of the principal.
The
balance owed is thus [6000 - 1778] or $4222.
3.
The amount to be deposited today is the present value equivalent (PV) of the 8
withdrawals.
i)
PV = 1000 (P/A,6%,8) = 1000 (6.2098) = $6210
ii)
PV = 1000 (P/A,10%,8) = 1000 (5.3349) = $5335
iii)
PV = 1000 (P/A,15%,8) = 1000 (4.4873) = $4487
Using a financial calculator with N=8, PMT=1000 and I/Y=6%, 10% and 15%, compute PV to
obtain -6209.79, -5334.93 and -4487.32, respectively.
As the interest rate increases, the amount to be deposited today decreases.
4.
The amount that can be withdrawn in nine years' time is the future value equivalent (FV) of
the three deposits at that time.
FV = 1000 (F/P,10%,9) + 1000 (F/P,10%,6) + 1000 (F/P,10%,3)
= 1000 (2.3579 + 1.7716 + 1.3310) = $5461
There are many ways of solving this problem with a financial calculator.
For instance, with
N=3, I/Y=10% and PV=1000, compute FV to obtain -1331.
Change the sign, add 1000 to obtain
2331, and enter this value in PV.
Compute FV to obtain -3102.56.
Change the sign, add 1000 to