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CHAPTER #3 – THE TIME VALUE OF MONEY
1.
Construct monetary flow diagrams for the following situations:
i)
Invest $5000 today and save $4000 in two years' time as well as $3000 in five years' time;
ii)
Invest $2000 today and save $500 per year over a tenyear period;
iii)
Invest $1000 at time 0 and $500 at time 3, and receive $500 at time 1, $300 at time 2, $400
at time 4 and $600 at time 5;
iv)
Receive a series of 6 annual payments, with the first of $1500 today and each subsequent
one 10 percent greater than the previous, and remit $10 000 in six years' time.
2. Find the compound amount of a principal of $500 after five years at a nominal annual in
terest rate of 8 percent,
i)
compounded annually;
ii)
compounded quarterly;
iii)
compounded monthly;
iv)
compounded continuously.
3.
How much interest is earned on a principal of $600 over a period of five years and nine
months at an annual interest rate of 6 percent compounded monthly?
4.
What effective annual interest rate is associated with a nominal annual rate of 12 percent,
i)
compounded semiannually?
ii)
compounded quarterly?
iii)
compounded monthly?
5. A personal loan is made with interest of 3/4 percent per month charged on the unpaid bal
ance. The principal, along with accrued interest, are remitted after 18 months
i)
What are the nominal and effective annual interest rates?
ii)
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This note was uploaded on 02/14/2011 for the course MIME 310 taught by Professor Bilido during the Spring '08 term at McGill.
 Spring '08
 Bilido

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