January

FUNDAMENTAL OF FINANCIAL MANAGEMENT

1, 2015

TUTORIAL: TIME VALUE OF MONEY

1. Chapter 5: 5, 6, 9, 10, 11, 13, 18, 20, 22, 25, 28, 29, 30, 32, 36, 37, 41, 43, 49, 50, 51,
62, 65, 73, 72.
2. Suppose you make an investment of $1,000 now. This first two years the investment
returns 12%, the third year it returns 6%, and the fourth and fifth year it returns 8%. How much
would this investment be worth at the end of the fifth year, assuming no withdrawals are made in
between?
FV = 1,282.176
3. A wealthy relative gives Barney $5,000 to help provide for his new born child’s
university fee. He decides to invest this money at 10% p.a. until his child is ready to go to
university. How much will be in the account 18 years from now?
FV = 27,299.59
4. Barney wants to provide $20,000 for his new born child’s education, which will begin 18
years from today. How much should Barney invest now, if the interest rate is 10% p.a.?
PV = 3,597.18
5. Barney lends $100,000 to John, his cousin for a total of 10 years at 5% p.a.
a. How much does John have to pay after 10 years (if using simple interest rate)?
b. How much does John have to pay after 10 years (if using compounded interest
rate)?
c. Assume that Barney lends $100,000 to John, using simple interest rate, but wants
to receive the payment which is equal to that if using compounded interest. What should the
interest rate be?
a. FV = 150000
b. FV = 162,889.46
c. r’ = 6.2%
6. How long will it take certain investment to double in size when invested at the rate of 8%
per year? How long for triple in size?
N = ln2/ln1.08 = 9.006 years = 10 years
N = ln3/ln1.08 = 14.27 = 15 years
7. How long will it take for a $3,000 investment to grow to $10,000 if invested at 5%
interest
a. compounded annually? 25 years
b. compounded quarterly? 97 quarters
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8. You borrow money on your credit card at 17.5% p.a., compounding quarterly. What is
the effective annual interest rate?
EAR = 18.68%
9. The following interest rates are being offered by three competing banks: 4% compounded
monthly; 4.1% compounded quarterly; 4.15% compounded annually. Which one is the most
attractive?
Bank 1: EAR1 = (1+4%/12)^12 – 1 = 0.0407 = 4.07%
Bank 2: (1+4.1%/4)^4 – 1 = 4.16% => highest
Bank 3: EAR3 = 4.15%
10. On a contract, you have a choice of receiving $25,000 six years from now or $50,000
twelve years from now. At what implied compound annual interest rate should you be indifferent
between the two contracts?
R = 12.24%
11. You have just won the prize in the State lottery. A recent innovation is to offer prize
winners a choice of payoffs. You must choose one of the following prizes:
a. $1,000,000 paid immediately = PV
b. $600,000 paid exactly one year from today, and another $600,000 paid exactly
3 years from today => uneven: PV = 1,031,855
c. $70,000 payment at the end of each year forever (first payment occurs exactly 1
year from today) => pepe: PV = 875,000
d. An immediate payment of $600,000 =PV, then beginning exactly 5 years from
today, an annual payment of $50,000 forever => perpe: PV = 1,059,393.66
e. An annual payment of $200,000 for the next 7 years (first payment occurs exactly
1 year from today) => ordinary: PV = 1,041,274.01
You believe that 8% p.a. compounded annually is an appropriate discount rate. Assuming you
wish to maximize your current wealth, which is the best prize? => Choose D: highest PV
12. Your company anticipates the introduction of environmental protection laws 3 years from
now. Under these laws, you will have to pay an environment tax of $5,000 at the end of each
year. If the rate is 6% p.a., how much money does your company need to put aside today to
sponsor your company’s obligation under this law?
PV2 = 83,333.3 => PVo = 74,166.37
13. Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide
him with a steady income over the next 12 years. He has heard that the local bank is currently
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FUNDAMENTAL OF FINANCIAL MANAGEMENT
1, 2015
paying 6% p.a. (compounding annually). If he were to deposit his fund, what is the equal amount
would he be able to withdraw at the end of each year for 12 years?
C = 2,981.9257
14. After graduation, you plan to work for your local bank for 12 years and then start your
own business. You expect to save and deposit $7,500 a year for the first 6 years and $15,000
annually for the following 6 years. The first deposit will be made a year from today. In addition,
your grandfather just gave you a $25,000 graduation gift which you will deposit immediately. If
the account earns 9% compounded annually, how much will you have when you start your
business 12 years from now?
Final amount = A + FV12 + FV’= 277,797
Gift: FV’ = 70,316.6
FV12 = 112,850
FV6 = 56,425 => compound thêm 6 năm => A = 94,630.4
15. Muffin Megabucks is considering two different savings plans in 10 years. The first plan
would have her deposit $500 every six months, and she would receive an interest rate at 7% p.a.
(compounding semi-annually). Under the second plan she could deposit $1,000 every year with
the rate of interest of 7.5% p.a. (compounding annually). Which plan should Muffin use?
(Assuming that the initial deposit of Plan 1 would be made 6 months from now, and with Plan 2,
one year from now).
Plan 1: FV = 14,139.84
Plan 2: FV = 14,147.08
Choose higher FV => plan 2
16. Kate’s financial advisor tells her that she will need $2 million to fund her retirement. She
plans to work for another 30 years before retiring. She will make 30 contributions to a pension
plan. How much will each contribution be, if the interest rate is 9% p.a.?
C = 14,672.7
17. Mary has just retired and has $1 million in her retirement account. Her bank offers an
arrangement whereby the bank takes her $1 million now and pays her $110,000 at the end of
each year for the next 20 years. Is it a fair deal, if the offered rate is 10% p.a.?
PV’ = 936,492 < PV = 1,000,000 => not fair
18. Mr. Doody, at age 70, is expected to live for 15 years. If he can invest at 12% per annum
compounded monthly, how much does he need now to guarantee himself $300 every month for
the next 15 years?
PV = 24,996.5
19. Daryl wishes to save money to provide for his retirement. Beginning one month from
now, he will deposit a fixed amount into a retirement savings account that will earn 12% p.a.
compounded monthly for 30 years. Then, one year after making his final deposit, he will
withdraw $100,000 annually for 25 years. How much should Daryl deposit for the first 30 years
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1, 2015
to meet his objective if the fund earns the interest rate of 12.68% p.a., compounded annually
during the last 25 years?
Bài này hôm mình k kĩ nên note trong handout sai ý. Bài này mình làm idea như bài 41a trong
sách nha.
FV30 (tổng tiền tiết kiệm) = PV30 (tổng tiền dùng sau nghỉ hưu), PV30 dùng cthuc PV ordi vs C
= 100k => PV30, và nó bằng FV30 => C = 214.24
20. The Happy Hang Glide Company is purchasing a building and has obtained a $190,000
mortgage loan for 20 years. The loan bears a compound interest rate of 17% p.a. and calls for
equal annual installment payments at the end of each of 20 years. What is the amount of annual
payment?
C = 33,761.168
21. A home buyer is purchasing a $140,000 house. The down payment will be 20% of the
price of the house, and the remainder will be financed by a 30-year mortgage at a rate of 9.8%
interest compounded monthly. What will the monthly payment be? Compare the monthly
payments and the amounts of interest paid if a 15-year mortgage is chosen instead of a 30-year
mortgage.
- 30-year mortgage:
Down payment = 20% * 140k = 28k
=> Loan = 140k – 28k = 112k = PV (n = 30*12, r = 9.8%/12): ordinary => C = 966.37
C* 30 *12 – loan = amount of interest
Interest = total paid – PV = 360 * C – 112k = 235, 893
- 15-year mortgage: n = 15*12 => C’ = 1189.89 => interest (tương tự) = 102,180.4
22. Ann obtains a $150,000, 20-year mortgage with a bank at 9% p.a., compounded monthly.
a. What is her monthly repayment?
b. Suppose that after 5 years, Ann plans to repay the loan by making an additional
payment each month along with her regular payment. How much must Ann pay each month if
she wishes to pay off the loan in 10 years?
PV = 150k, n = 20*12, r = 9%/12 => C (dùng cthuc PV ordi)
5 years pass => còn 15 năm => Tính nợ còn lại trong 15 năm: PV5 với C vừa tính ở câu a, n =
thời gian còn lại = 15*12, r = 9%/12
Tính C’ với PV5, n = 10*12, r = 9%/12
23. Mark wants to buy a new car for his wife and agrees with a 1.5-year, $12,000 loan. The
financial institution quotes this loan at 10.5%, compounded monthly. Six months later, Mark is
offered an optional loan from another financial institution. The new loan is quoted at 9.25% and
Mark asks that the number of payments be set to 12. A 1% fee will be added to the remaining
loan balance for the principal of the new loan. What was the first loan monthly payment and
what is the amount Mark is going to pay for the new one? Is it a good idea to change?
C = 723.45
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Nợ còn lại sau 6 tháng = 8,207.17
Nợ sau khi cộng 1% phí: PV’ = 8,289.24
C’ = 725.87
=> not a good idea
24. Mary enters into a loan agreement to borrow $90,000 to help finance the purchase of her
new home.
a. The agreement specifies the term of 20 years with monthly repayment at the fixed
rate of 9% p.a. (compounded monthly). What is her monthly payment?
b. Five years has passed. A rival lender offers to refinance Mary’s loan at the fixed
rate of 8% p.a. (compounded monthly). The cost associated with this refinancing is $1,500.
Should she refinance?
c. Suppose 9 years have passed since Mary enters the original loan. She’s
considering making an extra payment of $10,000 off her loan. If she plans to keep the term of the
loan the same, how much will her monthly repayment reduce?
a. C = 809.75
b.
Step 1: Số nợ còn lại trong 15 năm còn lại = PV5 (ordi annu: C ở câu a, r = 9%/12, n =
thời gian còn lại = 15*12) => PV5 = 79,836
Step 2: PV5 + 1500 = nợ thật sự mà mình phải vay ngân hang mới nếu refinance =
PV’=81,336
Step 3: Tính new monthly payment C’ (ordi annu: PV dc tính ở step 2, r = 8%/12, n =
15*12) => C’ = 777.28
C’<C: refinance
c. vẫn trả nợ trong 20 năm, C’’ =?
Tới năm 9, số nợ còn lại trong 11 năm = PV9 (C ở câu a, r 9%/12, n = 11*12)
=> PV9 = 67,700
trả extra payment = 10000 = phần giảm nợ => Nợ còn lại sau khi làm extra payment
trong 11 năm = PV9 – 10000 = PV’’=57,700
Tính C’’ (ordi: PV = PV’’, n = 11*12, r = 9%/12) => C’’ = 690.14
Reduction = C – C’’=119.61