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CH 3 Exercises - CHAPTER#3 THE TIME VALUE OF MONEY 1 i ii...

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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 ten-year 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 semi-annually? 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) Expressed as a proportion of the original amount, how much interest is paid?
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