Problem Set I
Time Value of Money and Stock and Bond Valuation
This assignment is for practice only.
It will not be graded and does not have to be turned in.
TIME VALUE OF MONEY
1.
What is the present value of a perpetuity that starts paying $1,000 annually after three years?
The discount rate is 10% (annual) until
t = 3
years, decreases to 8% (annual) for the next 10
years and further decreases to 6% (annual) thereafter.
2.
Your parents set up a new bank account, which pays 0.7% interest monthly, with a onetime
deposit of $30,000 on the day you start college. How much money can you withdraw after the
first month of college (your first withdrawal) if you want to make 48 monthly withdrawals,
increasing the amount of each withdrawal by 0.3%?
3.
How much money will you have in your bank account 25 years from now if you make 10
equal annual deposits of $100,000 starting today? The bank pays an annual (stated) interest of
10%, compounded semiannually. How much should each of the ten deposits be if you want
to have $5 million after 25 years?
4.
What is the present value of a perpetuity that pays $1,500 annually starting one year from
now? The time value of money is 8% (annual) for the first 10 years but decreases to 6%
(annual) thereafter.
5.
When Trey was born his parents established a $5,000 bank account to help with his college
expenses. Since then they have been depositing $2,000 annually into the account on each
birthday. Yesterday (Trey’s 18
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 Fall '06
 Hadaway
 Time Value Of Money, Corporate Finance, Perpetuity, Valuation, bank account

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