A2StudyPack2010

A2StudyPack2010 - F370 A2 Study Pack - Page 1 2010 Dan...

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F370 A2 Study Pack -- Page 1 © 2010 Dan Greiner Study Pack for the A2 Lecture Vocabulary for the A2 Lecture Risk Free Rate, Risk Premium Cash Flow Uncertainty Time Value of Money Present Value [PV] Future Value [FV] , Future Cash Flow [ CF i ], Nominal Value of a Cash Flow Rate of Return vs. Discount Rate vs. Implied Return [ I ] Term [N] Payment [PMT] Lump Sum, Uneven Stream Annuity, Annuity Due, Deferred Annuity Perpetuity, Growing Perpetuity Formulas for the A2 Lecture r = r f + r p PV = FV / (1+r) n or PV = CF / (1+r) n …. Lump Sum …or FV = PV(1+r) n PV = ∑ [ CF i / (1+r) i ] …..General Formula and Uneven Stream PV = (PMT / r) (1 - 1/(1+r) n ) …Annuity (ordinary) PV of an annuity due = (1+r) * (PV of an equivalent ordinary annuity) PV = PMT / r …Perpetuity PV = PMT 1 / (r-g) …Growing Perpetuity
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F370 A2 Study Pack -- Page 2 © 2010 Dan Greiner Problem Set for A2 Lecture I. Basic Problems Lump Sums 1. If you save a present value of $340 and plan to earn a 6.5% annual return, then what future value do you expect to have after 9 years? 2. If you invest $420 and expect an annual return of 11% and you want to grow this amount into $2,230.58, then how long should you expect to have to wait until you hit your target future value of $2,230.58? 3. If you invest $210 and want it to grow into $264.21 over the next five years, then what annual return must you earn? 4. If you want to have $50,000 in your investment account exactly 12 years from today, then how much present value should you deposit right now if you expect to earn 13% return per year? 5. ** If you save a present value of $3,600 in an account that pays a 7% return for 3 years and then a 10% return thereafter, then what will be your future value after 8 years? 6. ** How long will it take you to triple an initial deposit if you are using an account that pays a 12% return for the first 4 years and then an 8.5% return thereafter? 7. ** Suppose that you invest $1,000 and it earns 9% a year for 5 years. You then add $X to this future amount and proceed to grow that sum for 10 more years at a 6% rate. If your final account level is $4,044.85 after the full 15 years, then what must $X (your time-5 deposit) have been?
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F370 A2 Study Pack -- Page 3 © 2010 Dan Greiner Uneven Streams 8. What is the present value of a stream of cash flows that pays $500 at timepoint one, $750 at timepoint two, $170 at timepoint three and $920 at timepoint four? The stream has a level of risk that leads you to believe that its discount rate
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A2StudyPack2010 - F370 A2 Study Pack - Page 1 2010 Dan...

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