This preview has intentionally blurred sections. Sign up to view the full version.
View Full DocumentThis preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
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....
View
Full Document
 Fall '11
 PILLOFF
 Time Value Of Money, Interest, Net Present Value, Bank Problems

Click to edit the document details