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Quick review of FINC 318
1.
What is present value? How much you get now
What is future value? How much what you get now grows to when compounded at a
given rate
What is interest rate? “Exchange rate” between earlier money and later money
2.
Suppose you invest $1,000 for one year at 5% per year.
What is the future value in one
year? Suppose you leave the money in for another year.
How much will you have two
years from now?
In 1 year: FV = PV (1+r)
t
= 1,000 * (1+0.05) = $1,050
In 2 years: FV = 1,050 * (1+0.05) = 1,000 * 1.05
2
= 1102.5
3.
Your parents set up a trust fund for you 10 years ago that is now worth $19,671.51. If the
fund earned 7% per year, how much did your parents invest?
PV = FV / (1 + r)
t
= 19.671.51 / 1.07
10
= 10,000
4.
You are offered an investment that will pay you $200 in one year, $400 the next year,
$600 the next year and $800 at the end of the next year.
You can earn 12 percent on very
similar investments. What is the most you should pay for this one?
NPV = 200/(1+0.12) + 400/(1+0.12)
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 Spring '10
 Finance
 Exchange Rate, Future Value, Interest, Interest Rate

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