tut2solutions - FINS 5514 Week 2: Time Value of Money &...

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1 FINS 5514 Week 2: Time Value of Money & Discounting Solutions 1.d Alpha Bank: $1,000(1.04) 5 - $1,000 = $216.65 compound interest Beta Bank: $1,000(.04)(5) = $200.00 simple interest Interest on interest paid by Alpha Bank = $216.65 - $200.00 = $16.65 2. a PV = $10,000[1/(1.08) 10 ] = $4,631.93 3. c $3,200 = $1,650(1.075) t 1.93939 = 1.075 t ln 1.93939 = t(ln 1.075) .66238 = .07232t t = 9.16 4. c FV = $10,000(1.0825) 4 = $13,731.30 5. a All else equal, the future value will increase as the period of time increases. 6. a $10,000(1+r) 5 = $25,000 1+ r = 1.2011244, r = 20.11% 7. a All else equal, the present value will increase as the rate of return decreases. 8. c FV = $200(1.05) 4 + $400(1.05) 3 + $100(1.05) 1 = $243.10 + $463.05 + $105.00 = $811.15 9. b $1,000(1+r) 15 = $3,548.00 1+ r = 1.0880919, r = 8.81%
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2 20. We first need to find the annuity payment. We have the PVA, the length of the annuity, and the interest rate. Using the PVA equation: PVA = C ({1 – [1/(1 + r) ] t } / r ) 56,850 = $ C [1 – {1 / [1 + (.056/12)] 60 } / (.056/12)] Solving for the payment, we get: C = 56,850 / 52.226 = 1,088.53 To find the EAR, we use the EAR equation: EAR = [1 + (APR / m )] m – 1 EAR = [1 + (.056 / 12)] 12 – 1 = 5.75% 22. Here we are trying to find the interest rate when we know the PV and FV. Using the FV equation: FV = PV(1 + r ) $4 = $3(1 + r ) r = 4/3 – 1 = 33.33% per week The interest rate is 33.33% per week. To find the APR, we multiply this rate by the
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This note was uploaded on 04/11/2011 for the course FINS 5514 taught by Professor No during the Three '11 term at University of New South Wales.

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tut2solutions - FINS 5514 Week 2: Time Value of Money &...

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