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Unformatted text preview: FNAN 301 Solutions to test bank problems time value of money part 1 Some answers may be slightly different than provided solutions due to rounding 1. How much will you have in a. 16 years if you invest $500 today at an annual rate of 5.6%? b. 18 years if you invest $500 today at an annual rate of 5.6%? c. 18 years if you invest $500 today at an annual rate of 6.6%? d. 18 years if you invest $400 today at an annual rate of 6.6%? e. 18 years if you invest $400 today at an annual rate of 4.6%? a. FV t = C (1 + r) t C = 500; r = .056; t = 16 FV 16 = 500 (1.056) 16 = 1,195.62 Mode is not relevant, since PMT = 0 Enter 16 5.6500 N I% PV PMT FV Solve for 1,195.62 b. FV t = C (1 + r) t C = 500; r = .056; t = 18 FV 18 = 500 (1.056) 18 = 1,333.28 Mode is not relevant, since PMT = 0 Enter 18 5.6500 N I% PV PMT FV Solve for 1,333.28 c. FV t = C (1 + r) t C = 500; r = .066; t = 18 FV 18 = 500 (1.066) 18 = 1,579.79 Mode is not relevant, since PMT = 0 Enter 18 6.6500 N I% PV PMT FV Solve for 1,579.79 d. FV t = C (1 + r) t C = 400; r = .066; t = 18 FV 18 = 400 (1.066) 18 = 1,263.83 Mode is not relevant, since PMT = 0 Enter 18 6.6400 N I% PV PMT FV Solve for 1,263.83 e. FV t = C (1 + r) t C = 400; r = .046; t = 18 FV 18 = 400 (1 + (.046)) 18 = 171.37 FV 18 = 400 (.954) 18 = 171.37 Mode is not relevant, since PMT = 0 Enter 184.6400 N I% PV PMT FV Solve for 171.37 1 FNAN 301 Solutions to test bank problems time value of money part 1 2. Investment A has a return of RA per year and investment B has a return of RB per year. If RA > RB > 0 and you invest $1,000 today, will you have more money in T years if you invest in investment A or if you invest in investment B or will both investments be worth the same? Answer: You would have more with investment A With any investment that will pay $1,000 in T years, you would have 1,000 (1 + r) T With investment A, you would have 1,000 (1 + RA) T With investment B, you would have 1,000 (1 + RB) T We can conclude that 1,000 (1 + RA) T > 1,000 (1 + RB) T Since both A and B are positive, 1+RA and 1+RB are both greater than 1, which means that both investments get more valuable each year. However, since RA > RB, investment A gets more valuable each year than investment B 2 FNAN 301 Solutions to test bank problems time value of money part 1 3. Investments A and B have the same return of X per year. Investment A will pay investors a lump sum in TA years and investment B will pay investors a lump sum in TB years. If TA > TB > 0, X > 0, and you invest $1,000 today, will you get more money when investment A pays its lump sum in TA years or when investment B pays its lump sum in TB years? Note that all investments with a return of X have the same return....
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This note was uploaded on 09/16/2011 for the course FNAN 471 taught by Professor Pilloff during the Fall '11 term at George Mason.
 Fall '11
 PILLOFF

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