Investment and Time Value of Money Exercise 1

Simple Discount at an Interest Rate and Simple Discount at a Discount Rate

1. The value of the obligation in 6 months is:
6
1500[1 (0.11)( )] $1582.50
12

Let $x be the value of the obligation at the end of 3 months, and $Y be the value at the
end of 12 months
3 1
)] $1525.30
12

a. X 1582.50[1 (0.15)(

6
)] $1701.19
12

b. Y 1582.50[1 (0.15)(

2. We have D = 1,000,000 968,230 = $31,770, S = 1,000,000 at t = 91/360

d

D
31,770

12.57%
St 1,000,000(91 / 360)

3. a.
The bank earned interest I = 990,000 968230 = $21,770 over 60 days on
the investment of $968,230. Therefore:
r

b.

I
21,770

13.49%
Pt 968,230(60 / 360)

We have D = 10,000, S = 1,000,000, and t = 31/360

d

D
10,000

11.61%
St 1,000,000(31 / 360)

4. $1 at rate r for 3 years will accumulate to (1 + r)3 ; $1 a the given rates for 3 years
will accumulate to:

(1 r ) 3 (1

r = 13.04%

0.15 12
0.10 4
0.12 365
) (1
) (1
)
12
4
365

5. Maturity value: S 2500(1

Proceeds:

0.1525 48
) $4583.43
12

P 4583.43(1

0.135 11
)
3181.41
4

Compound discount: S P = 4583.43 3181.41 = $1402.02

6.

We have P = 1000, i = 0.135/2, n = 2 x 5 7/12 = 67/6

S P (1 i ) t 1000(1

0.135 67 / 6
)
$2073.84
2

Q7. Complicated TVM Exercise Education Fund for two brothers

Here we show you all the required concept and necessary steps to find out the
answer through the application of financial notation and the keys for financial
calculator operation. However, students are expected to work out the solution step
by step through the application of the annuity formula which is presented to you in
the class.
When the elder brother goes to the college, the first year college fees:
E = $20,000 x 1.0618-7 = $37,966
Elder brothers PV =
E

E 1.06 E 1.06 2 E 1.06 3 E 1.06 4 E 1.065

(1.12)
(1.12) 2
(1.12) 3
(1.12) 4
(1.12) 5

Pmt = E = 37,966
1.12

i=
1 100%
1.06

n=6
FV = 0
PV1 = PVbgn = $199,381

When the younger brother goes to the college, the first year college fees:
E = $20,000 x 1.0620-7 = $42,659
Younger Brothers PV =
E

E 1.06 E 1.06 2 E 1.06 3 E 1.06 4 E 1.065

(1.12)
(1.12) 2
(1.12) 3
(1.12) 4
(1.12) 5

Pmt = E = 42,659
1.12

i=
1 100%
1.06

n=6
FV = 0
PV2 = PVbgn = $224,024

Merged FV = PV1 x 1.12(25-18) + PV2 x 1.12(25-20) = $440,768 + $394,807 = $835,575

Therefore, FV = 835,575
pmtbgn = $14,988

n = 25 -7,

i% = 12%

Annual savings for shall be $14,988 depositing at the end of each year.