Problem Set I-1

# Problem Set I-1 - Problem Set I Time Value of Money and...

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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 one-time 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 semi-annually. 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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## This note was uploaded on 01/15/2010 for the course FIN 357 taught by Professor Hadaway during the Fall '06 term at University of Texas at Austin.

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Problem Set I-1 - Problem Set I Time Value of Money and...

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