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Lecture 3 Questions

This document contains 9 questions related to compound interest rate calculations. The questions cover topics such as calculating interest rates given future values, calculating time periods given interest rates, analyzing cash flows with different interest rates, comparing future values of savings plans with different interest rates and payment schedules, calculating implied interest rates to be indifferent between payment options, calculating annuity payments and costs given interest rates and life expectancies, calculating loan payments and amortization schedules for loans with equal annual payments, and calculating equal loan installment payments to repay a loan amount plus interest over a time period.

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Pubg Kr
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53 views

Lecture 3 Questions

This document contains 9 questions related to compound interest rate calculations. The questions cover topics such as calculating interest rates given future values, calculating time periods given interest rates, analyzing cash flows with different interest rates, comparing future values of savings plans with different interest rates and payment schedules, calculating implied interest rates to be indifferent between payment options, calculating annuity payments and costs given interest rates and life expectancies, calculating loan payments and amortization schedules for loans with equal annual payments, and calculating equal loan installment payments to repay a loan amount plus interest over a time period.

Uploaded by

Pubg Kr
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Q1: Lets assume if you invest $1000 today, you

will receive $3000 in exactly 8 years. What is


the interest rate annually that compounds to
give you $3000?
Q2: How long would it take for an investment
of $1000 to grow to $1,900, if we invest it at a
compound annual interest rate of 10%?
Q3:The following cash flows need to be analyzed:
Years W X Y Z
1 100 600 - 200
2 200 - - -
3 200 - - 500
4 300 - - -
5 300 - 1200 300

a. Calculate the future value of each stream at the end of year 5 with a
compound annual interest rate of 10%.
b. Compute the present value of each stream if the discount rate is 14%.
Q4: Amjad is considering two different savings plans. The
first plan have him deposit Rs. 500 every six months
and he would receive interest at a 7% annually,
compounded semi-annually. Under the 2nd plan he
would deposit Rs. 1000 every year with a rate of
interest 7.5%, compounded annually.
a. Future value of plan 1 at end of 10th year
b. Future value of plan 2 at end of 10th year
c. Which plan should she go for if he concern is only the
savings at end.
d. Would your answer change if the annual interest rate
changes to 7% for plan 2.
Q5: On a contract you have a choice of
receiving 25,000, six years from now or 50,000,
twelve year from now. At what implied annual
interest rate should you be indifferent between
the two contracts.
Q6: Amjad wishes to purchase an annuity contract
that will pay him 7000 a year for the rest of his
life. The state life insurance figures that his life
expectancy is 20 years. The company imputes a
compound annual interest rate of 6% in its
annuity contract.
a. How much Amjad will have to pay for the
annuity
b. How much would he have to pay if the interest
rate were 8%.
Q7: You borrow 10,000 at 14% compound
interest for 4 years. The loan should be
payable in equal 4 instalments annually.

a. What is the annual payment that will


completely amortize the loan over 4 years
b. Of each equal payment, what is the amount
of interest and principal.
Q8: Haider recently obtained a 10 year, $50,000
loan. The loan carries 8% compound annual
interest rate and calls for annual instalment
payments of $7,451.47. At the end of the
each of the next 10 years.
a) How much of the first year’s payment is
principal?
b) How much total interest will be paid over the
life of the loan?
Q9: Suppose you borrow $22000 at 12%
compound annual interest to be repaid over the
next six years. What is the equal instalment
payments are required at the end of each year?
These payments must be sufficient in amount to
repay the $22000 together with providing the
lender with a 12% return.

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